But there is a bigger spectre stalking the commercial-property market, and one with dire consequences for the rest of the economy. A giant overhang of loans, many of them in the hands of two bailed-out British banks, needs refinancing—£35 billion next year alone, and up to £120 billion more by 2013. Few of the usual equity investors, such as real-estate investment trusts and private-equity funds, will come in at today's prices, given how little is on offer and how hard it is to get credit. So the banks are hanging on, able to do so only because low interest rates mean their funding cost is low. Meanwhile, other parts of the economy, especially cash-strapped firms, are being starved of the loans they need. Next year, things could get worse.
Commercial-property values in central London have fallen by as much as 50% since the financial crisis hit.
According to HSBC, a bank, some 85% of the bank debt extended since the start of 2004 and secured against commercial property in Britain has breached loan covenants (requiring a loan-to-value ratio of 75% or less) or debt-service requirements. On another measure, £40 billion is in negative equity—ie, the property is worth less than the outstanding loan.
Banks in this situation face a stark choice: foreclose on the loan and trigger a fire sale, or hang on in the hope that the market will improve. Most are hanging on, as the chart shows: outstanding property loans to British entities have stuck above £250 billion since the end of 2008.
