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Property Boom and Banking Bust

The Role of Commercial Lending in the Bankruptcy of Banks


Colin Jones

Professor of Estate Management

The Urban Institute

Heriot‐Watt University

Stewart Cowe

Formerly Investment Director

Real Estate Research and Strategy

Scottish Widows Investment Partnership

Edward Trevillion

Honorary Professor

The Urban Institute

Heriot‐Watt University





To Fiona and Louyse for their patience and understanding during the preparation of this manuscript.

For Margot for her constant support over many years and to Adriana who encouraged me to put pen to paper.

List of Figures

1.1Nominal and real capital value growth 1971–1977
1.2Nominal and real capital value growth 1987–1997
1.3Real commercial property capital values 1981–2010 (1981 = 100)
2.1Quarterly cash flow into specialist (retail) real estate funds, 2001–2007
3.1Global debt outstanding in 2000 and 2007 broken down by sector
3.2Commercial property capital growth in selected countries
3.3Total property debt as a percentage of invested stock in different parts of the world 1998–2009
3.4Commercial real estate lending as a percentage of annual UK GDP 1970–2011
3.5Annual bank lending for property in the United Kingdom 2000–2010
3.6International sources of bank lending in the United Kingdom 2004–2010
3.7Bank base rates and 5‐year swap rates 2000–2010
3.8Average interest rate margins for bank lending to commercial property 2002–2011
3.9Average interest rate margins on prime and secondary retail properties 2002–2012
3.10Differences between initial yield and funding costs 2000–2010
3.11Average maximum loan to values on commercial property lending by banks 2002–2012
3.12Office development in London 1985–2011
3.13Annual retail warehouse space completed 1993–2014
3.14Annual completions of town centre and out‐of‐town shopping centres 1965–2014
4.1Annual US economic growth and commercial property returns 1978–2014
4.2Annual UK economic growth and commercial property returns 1978–2014
4.3Commercial property capital growth in selected countries 2000–2009
4.4Long‐term capital and rental value growth patterns 1975–2015
4.5Annual contributions to capital growth 1981–2007
4.6Quarterly capital and rental value growth in the retail sector 2000–2009
4.7Quarterly capital and rental value growth in the office sector 2000–2009
4.8Quarterly capital and rental value growth in the industrial sector 2000–2009
4.9Net quarterly institutional investment into commercial property, 2001–2009
4.10Net quarterly institutional investment in the UK property sectors, 2001–2009
4.11Indices of the annual real value of institutional purchases by property sector 1981–2010
4.12Indices of the annual real value of institutional sales by property sector 1981–2010
4.13Value of commercial property transaction volumes, 2000–2009
4.14Weighted average yield of property purchased by investors compared to the market average in 2006
4.15Patterns in retail sales of property fund units to investors and commercial property values, 2000–2009
4.16Yield gap between yields on gilts and commercial property, 2001–2009
5.1Office yields in the United Kingdom and Western Europe 2007–2015
5.2Office yields in EMEA countries and the Americas 2007–2015
5.3Yield trends in the Asia Pacific region 2007–2015
5.4Indexed capital value and rental value change in the UK property market 2000–2014
5.5Indexed capital value change by sector, 2000–2009
5.6Contributions to capital growth, 2000–2009
5.7Peak to trough change in capital values by length of unexpired lease
5.8Peak to trough changes in capital values by asset quality defined by value
5.9Net investment by financial institutions by property sector, 2006–2014
5.10Transaction volumes in the commercial property market 2000–2015
5.11Market and valuation yields, 2007–2010
5.12Yield Spreads of Sales by Investor Types, 2007–2009
5.13Quarterly cash flow into specialist (retail) real estate funds 2000–2015
5.14Yield gap between gilts and commercial property, 2001–2009
6.1Major UK banks’ customer funding gap, 2000–2008
6.2HBOS property and property related exposures, drawn balances at November 2008
6.3HBOS impaired loans as a percentage of year‐end loans and advances, 2000–2009
6.4HBOS monthly impairment losses charged to the income statement in 2008
7.1Actual and forecast 10‐year gilt yield gaps, 1987–2013
7.2Actual and forecast index‐linked gilt yield gaps, 1987–2013


We thank MSCI for permission to use its data on worldwide property trends. We also thank Property Data for permission to use their UK transactions data. Both of these data sources represent the essential empirical base for the book. We also acknowledge the support of CBRE, the De Montfort UK Commercial Property Lending Survey, the Investment Property Forum and Real Capital Analytics in giving permission to reproduce figures from their reports.


Authorised property unit trust – a means by which personal investors can access and invest in the property market.
The Basel international agreements relate to common global standards of capital adequacy and liquidity rules for banks. These were first introduced in 1988. Since 2013, the amount of equity capital that banks are required to have has been significantly increased by BASEL III.
Fannie Mae
Fannie Mae is a US government sponsored enterprise originally set up in 1938. It operates in the ‘secondary mortgage market’ to increase the funds available for mortgage lenders to issue loans to home buyers. It buys up and pools mortgages that are insured by the Federal Housing Administration (see below). It finances this by issuing mortgage‐backed debt securities in the domestic and international capital markets.
Federal Housing Administration
The Federal Housing Administration is a US government agency created in 1934. It insures loans made by banks and other private lenders for home building and home buying.
Freddie Mac
Freddie Mac is a US government sponsored enterprise established in 1970 to provide competition to Fannie Mae and operates in the same way.
lending margins
The difference between the rates banks charge to borrowers and that paid (usually) on the wholesale markets or to savers.
limited partnership
A partner in a limited partnership has limited liability but normally has a passive role in management. There is also a manager who decides the investment policy of the partnership.
Liquidity is the ability to transact quickly without causing a significant change in the asset’s price. Property tends to be considered illiquid, not least because of the time taken for a transaction.
The National Asset Management Agency was established in 2009 by the Irish government as one of the initiatives taken to address the crisis in Irish banking. It took over the bad property loans from the Irish banks in an attempt to improve the management of credit in the economy.
The Organisation for Economic Co‐operation and Development (OECD) comprises a group of 34 countries that includes all Western countries. It was set up in 1961 to promote policies that improve economic and social well‐being in the world.
off balance sheet
It refers to the ability to place assets and liabilities off a company’s balance sheet.
open ended funds
A collective investment vehicle where the number of shares or units can be increased or decreased according to cash flow into and out of the fund.
A pre‐let is a legally enforceable agreement for a letting to take place at a future date, often upon completion of a development.
A Real Estate Investment Trust is a listed company which owns and manages (generally) income producing real estate and which is granted special tax measures (i.e. income and capital are paid gross of tax with any tax being paid according to the shareholder’s tax position).
retail fund
An open‐ended fund that invests funds which are derived from selling units primarily to individual investors.
rights issue
A rights issue occurs when a company issues more shares and its existing shareholders have the initial right to purchase them.
This is the practice of pooling assets (often commercial/residential mortgages) and selling, usually bonds, with interest payments to third party investors. The interest payments on these securities are backed by the income from the mortgages.
sovereign debt crisis
The failure or refusal of a country’s government to repay its debt (interest payments or capital) in full is a sovereign debt crisis.
upward only rent review
A typical lease may have points in time in the future when the rent is due for review. An upward only rent review is the term used to describe a situation in which the rent payable following a review date cannot be reduced (even if market rents have generally fallen since the last review).