Rising property values could bail out the banks
Commercial property values are rising again and no-one should be more pleased than the owners of Britain’s banks – ie, us. Balance sheet write-offs could soon be replaced by write-backs.
In the two years after the credit crunch, the value of UK shops, factories and office blocks fell by an average 44 per cent according to IPD, the agency that turns valuations into an index. But since August 2009 the market has been rising again and could record a 5 per cent gain for the period to December. That doesn’t do much to undo the previous decline in values but it is good news simply because the fall has been halted and it is good news because past losses will be partly unwound.
Britain’s banks are now the country’s biggest owner of real estate. The largest quoted property company, Land Securities, is dwarfed by the holdings of HBoS, the bank rescued by Lloyds. But if values are rising again Lloyds looks like it was correct to say in August that is thinks the worst is over in terms of provisioning and it was correct in remaining outside the government’s asset protection scheme.
The government, meanwhile, will have done well by insuring Royal Bank of Scotland’s assets at a premium that perhaps no longer reflects the risk – though as the government owns RBS, this may be a transfer from right-hand pocket to left.
Even for the 31 December 2009 year-end, these banks may be able to start writing back some of the property provisions already made and should be able to avoid some “impairments” – as banks like to call these writedowns – that would otherwise be necessary.
But a rise in commercial property values is good news for all owners, not just the banks forced to assume ownership because of defaults. The engineering company that avoids having to write down its fixed assets may thus avoid breaching a banking covenant. It may be able to use those assets as collateral against extra borrowing.
No one is talking yet of a new property boom, but an end to falling values is an important step in stabilising the finances of both banks and their customers.
