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. This has led to a bifurcated market, with the equity side (Reits in particular) seeming to actively manage assets more successfully through the rally while the bank side remaining sluggish to react.
This does little to assuage the fears of those mindful of the volume of outstanding real estate loans that need to be financed in Europe. Commercial real estate and SME loans are perhaps the most worrisome of all bank exposures – particularly because the fiscal protections that have so far buffered these portfolios from losses are now set to be withdrawn.