'UK property losses could trigger second credit crunch'

Commercial property companies, banks and investors must look to broader restructuring and refinancing solutions, says Close Brothers, a European corporate finance adviser. The group is urging banks and investors in the UK property sector to devise alternative financing solutions in the face of a potential £140 bn (EUR 155 bn) price fall and a £125 bn debt refinancing bill over the next four years.

Going into 2009, it has been calculated that banks are exposed to approximately £250 bn of UK commercial property debt, of which 50% needs to be refinanced in the next four years. Close Brothers believes the scale of this issue is likely to trigger further write-downs and, combined with the impact of a worsening wider economy, a second credit crunch in due course.

Gareth Davies, managing director in Close Brothers' European Restructuring and Debt Advisory Group, said, 'The commercial property world has not seen a significant downturn since the early 1990s when the financing structures deployed were much simpler and less aggressive. Banks adopted a strategy of selling assets into a distressed market however; this caused a death spiral with ever-decreasing prices.'

Today, appetite among banks to write new loans has evaporated, with a corresponding drop in acquisition activity and price depreciation. Close Brothers predicts that by the time the market has bottomed in late 2009 - early 2010, prices will have fallen by 50% to 60%.