The recent rally in real estate prices – particularly in the UK – has disguised the fact that these assets still present a big problem for many bank balance sheets. According to CBRE, UK commercial capital values jumped more than 10% in the final quarter of 2009, and in January JPMorgan had a capital growth estimate of 15% for the 12 months to June 2010 and a first-quarter estimate of 5% growth.
But because of the savage mark-to-market losses that many real estate portfolios have sustained, many banks have moved their real estate loans from the trading book to the banking book and have thus been unable to take advantage of the recent rally without tainting the tax treatment of the loans in the bank book.
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