The Property Industry Alliance (PIA) seeks to give the commercial property sector a more coordinated and effective voice on issues such as policy, research and best practice.
October 2018: Chairman of the PIA Long-term Value Methodologies working group, Rupert Clarke, issues report ‘THE CRE LENDING BLACK HOLE’
Research undertaken has revealed for the first time that UK banks collectively made no profit from real estate lending during the market cycle from 1992 to the 2008 crash. Authored by Rupert Clarke, a 35-year veteran of the real estate and financial services sector who was previously chief executive of Hermes, the report says commercial property lending generated profits of c.£7.0bn during the last cycle. This was dwarfed by £19.3 bn of write-offs, mainly from loans made towards the end of the cycle.
Bad commercial real estate (CRE) loans were a large part of the reason HBOS and RBS needed bailouts a decade ago. According to the research, produced for the Property Industry Alliance, an umbrella group of listed property firms and fund managers, these problems were not unique to 2008: banks also failed to profit from lending to real estate during the previous two cycles – a period spanning over 50 years.
According to the report, at the lowest point in June 2009, more than £50 billion of capital was at risk of total loss. The research says that loan-to-value (LTV) ratios (a measure of how much value risk is being taken) were not adjusted to reflect increasing risks as property market values rose significantly towards the end of the cycle. It is vital that as the cycle progresses, LTVs should be proactively managed to reduce risk.
Clarke is calling on banks and their shareholders to take a more proactive approach to ensuring institutions have strategies for lending towards the end of cycles and processes in place to fully understand the risks they are taking on.