The UK's Financial Services Authority has underestimated the scale of the commercial property crisis, Europe's largest independent Primary and Special Servicer has warned.

The UK's Financial Services Authority has underestimated the scale of the commercial property crisis, Europe's largest independent Primary and Special Servicer has warned.

Hatfield Philips said on Wednesday that the watchdog's 2010 Financial Risk Outlook does not stress the real severity of the issues faced by banks if the economy is to recover. The special servicer added that the UK Government's desire to force UK banks to lend more could be fundamentally unrealisable until the market itself recovers.

Hatfield Philips stressed that a substantial number of the 60% of outstanding CMBS loans set to mature by the end of 2012 is unlikely to be able to refinance or repay their debts. Much of the scramble to raise new capital by the banks has been explicitly focused on shoring up their balance sheets against these anticipated losses.

However, the Government's strategy, announced in the pre-election budget, of committing Lloyds and RBS to increase lending to £94 bn (EUR 106 bn), presents further problems as it is likely that further capital would be required before they could consider additional new lending.

The primary and special servicer said that until a substantial majority of the current backlog of commercial property debt begins to work its way through the system, lenders will be faced with a destructive scenario of a subdued market hampering efforts to clear overhanging debt which will only continue to subdue the market.

With approximately £160 bn of the £225 bn total debt outstanding maturing over the next five years, the impact of such a cycle on the UK banking sector and broader economy could be severe, Hatfield Philips warned.

Stewart Hotston, director of Compliance and Reporting at Hatfield Philips said: 'The questions facing lenders are not simply about lending more debt but whether they can afford to lend, whether the market can sustain more debt and just how quickly the economy will recover. Successfully emerging from this recession will need a more considered approach and should demonstrate that both balance sheet lenders and the CMBS market are managing their way through the problem.'

Hatfield Philips services over £35 bn of securitised and conduit loans across Europe.

Click on the link below or go to http://www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2010.pdf to read the 2010 Financial Risk Outlook