RPT-BoE alerts banks to commercial property loan risk

(repeats item first sent earlier on Thursday)

By Sinead Cruise

LONDON, May 1 (Reuters) - A steep decline in UK commercial property values has raised probability of loan defaults which could pose a threat to profits at Britain's most active real estate lenders, the Bank of England said on Thursday.

In its latest Financial Stability Report, the central bank said the 16 percent drop in commercial property prices seen since last June has raised risk of losses on Britain's approximate 174 billion pounds ($266.4 billion) outstanding UK commercial real estate loan book to "material" levels. The BoE said the rapid property correction had led to a number of loan-to-value covenant breaches but it was yet to see an increase in loan default rates. (For a related story, click on [ID:nL21476067]).

According to a survey by compiled by the BoE and De Montfort University, if the commercial property loan default rate hit a baseline estimate of 1.5 percent, the UK's main property lenders could face a total implied write-off of 800 million pounds, or 3 percent of pretax profits.

If the default rate climbed to 10 percent, the implied write-off increases to 5.1 billion pounds or 19 percent of pretax profits, although BoE said such an increase was unlikely unless sliding property values were accompanied by a sharp deterioration in health of the corporate sector, a scenario last seen in the 1990s.

"Falls in property values erode the equity buffer with which borrowers can withstand financial shocks, implying higher losses on commercial property loans in the event of default," the report said.

The BoE said some UK banks could suffer additional losses as a result of the shutdown of the market for European Commercial Mortgage Backed Securities (CMBS).

At end 2007, the report said UK banks held around 16 billion pounds of highly rated UK CMBS, which would now be worth between 90-95 percent of par based on current secondary market pricing.