Cover
Title Page
List of Figures
Acknowledgements
Glossary
1 Introduction
1. Sub‐prime Lending Enters the Financial Vocabulary
2. The Global Extension
3. Commercial Property Market Context
4. Commercial Property’s Role in the Wider Economy
5. Property Investment and Short‐termism
6. Measuring Commercial Property Market Performance
7. Book Structure
2 Long‐term Changes to Property Finance and Investment
1. The Changing Role of the Banks in the United Kingdom
2. Property Development and Investment Finance
3. The Changing Investment Landscape of the Non‐banking Financial Institutions
4. The Other Main Players in Commercial Property
5. The Changing Face of Institutional Property Investment
6. Limited Partnerships
7. Jersey Rides to the Rescue
8. Unit Trusts and Indirect Investment
9. Conclusions
3 Economic Growth, Debt and Property Investment through the Boom
1. Global Economic Upturn and Debt Accumulation
2. The Property Boom and Escalating Debt
3. The Cost and Role of Debt
4. Development and its Finance in the Noughties Boom
5. The Weight of Money and Moving up the Risk Curve
6. Conclusions
4 The Anatomy of the Property Investment Boom
1. Commercial Property, the Macroeconomy and Globalization
2. Global Property Upswing
3. Market Trends in the Property Boom – Was Something Different this Time?
4. UK Investment Trends
5. Lending To Commercial Property in the United Kingdom
6. A Property Boom in an Irrational Market
7. Summary and Conclusions
5 The Global Financial Crisis and its Impact on Commercial Property
1. A Crisis Unfolds
2. The Impact on Global Property Markets
3. Capital and Rental Values in the United Kingdom Post 2007
4. But This Time the Bust Was Also Different
5. Investment Trends and Capital Value Falls
6. Changing View of Risk
7. Summary and Conclusions
6 Property Lending and the Collapse of Banks
1. The Crumbling of the UK Banking System
2. Royal Bank of Scotland
3. Halifax Bank of Scotland
4. Britannia Building Society and the Co‐operative Bank
5. Dunfermline Building Society
6. Irish Banking Collapse
7. US Experience
8. Discussion and Conclusions
7 Aftermath and Recovery
1. The Macroeconomic Context
2. Property Market Trends
3. Bad Bank Debts and Impairments: The Road to Redemption
4. The Response of Property Investors, Property Funds and Property Companies
5. Property Lending Post‐GFC
6. Implications for the Pricing of Commercial Property and Investment
7. Conclusions
8 Conclusions
1. Globalization
2. The Boom and Bust through the Prism of Valuations
3. Role of Banking
4. Irrational Exuberance
5. Could It Happen Again?
6. What Can Be Done?
7. Final Thoughts
References
Index
End User License Agreement

List of Tables

Chapter 02
1. Table 2.1 Average sectoral structure of institutional property investment funds in 1981 and 1995.
2. Table 2.2 Tax obligations by LPs for different levels of debt gearing before and after 2004 SDLT reform.
Chapter 03
1. Table 3.1 Household debt as a percentage of disposable income in selected OECD countries 1995, 2000 and 2009.
2. Table 3.2 Breakdown of outstanding property bank funding in the United Kingdom at the end of 2009 (£m).
3. Table 3.3 Indicative capital returns over the period 2004–2006 with different gearing ratios.
4. Table 3.4 Indicative capital losses over the period mid‐2007–mid‐2009 with different gearing ratios.
5. Table 3.5 Real value of private construction output by commercial property sector in Great Britain 1997–2015.
6. Table 3.6 Initial yield differentials of prime offices between UK provincial cities and the City of London 2001–2009.
Chapter 04
1. Table 4.1 Real house price growth in selected countries.
2. Table 4.2 Yield compression from the end of 2000 to end of 2007.
3. Table 4.3 Purchases by type of investor, 2002–2007 (£m).
4. Table 4.4 Net investment (£m) by investor type, 2002–2007.
Chapter 05
1. Table 5.1 A summary of the key events of the financial crisis in the United Kingdom and United States 2007–2010.
2. Table 5.2 National annual GDP growth in selected countries 2007–2009.
3. Table 5.3 Peak to trough changes in capital values in selected countries.
4. Table 5.4 Average falls in capital values by property sector, June 2007 to June 2009.
5. Table 5.5 Capital value falls November 1989 to May 1993.
6. Table 5.6 Percentage falls in capital value by region and property sector, June 2007–June 2009.
7. Table 5.7 Net investment (£m) by investor types, 2007–2015.
8. Table 5.8 Value of sales (£m) by type of investor, 2007–2015.
Chapter 06
1. Table 6.1 Annual impairment losses on loans and advances to customers at major UK banks, 2007–2013 (£m).
2. Table 6.2 Annual RBS impairment losses by lending category, 2008–2010 (£m).
3. Table 6.3 Annual growth of assets in selected divisions, 2004–2008 (£bn).
4. Table 6.4 Annual impairment growth 2008–2011 by asset type (£bn).
5. Table 6.5 Estimated long‐term value of underlying property in 2010 (€m).
6. Table 6.6 Commercial bank failures by year in the United States 1985–1993 and 2007–2015.
7. Table 6.7 Construction and land loan balances at year end in US commercial banks.
Chapter 07
1. Table 7.1 Change in real GDP per capita in selected countries 2008–2015.
2. Table 7.2 Most Recent Downturns in Real House Prices in Selected Countries.
3. Table 7.3 Change in real house prices in selected countries from 2007 to 2015.
4. Table 7.4 Trends in commercial property capital values for selected countries.
5. Table 7.5 Annual commercial property rental value percentage change in the United Kingdom 2007–2014 by sector.
6. Table 7.6 Annual commercial property capital value percentage change in the United Kingdom 2007–2014 by sector.
7. Table 7.7 Structure of Isobel joint venture sub‐performing loan fund.
8. Table 7.8 Number and value of European commercial property loan portfolio transactions in 2015.

List of Illustrations

Chapter 01
1. Figure 1.1 Nominal and real capital value growth 1971–1977.
2. Figure 1.2 Nominal and real capital value growth 1987–1997.
3. Figure 1.3 Real commercial property capital values 1981–2010 (1981 = 100). Figures deflated by the retail price index.
Chapter 02
1. Figure 2.1 Quarterly cash flow into specialist (retail) real estate funds, 2001–2007.
Chapter 03
1. Figure 3.1 Global debt outstanding in 2000 and 2007 broken down by sector.
2. Figure 3.2 Commercial property capital growth in selected countries.
3. Figure 3.3 Total property debt as a percentage of invested stock in different parts of the world 1998–2009.
4. Figure 3.4 Commercial real estate lending as a percentage of annual UK GDP 1970–2011.
5. Figure 3.5 Annual bank lending for property in the United Kingdom 2000–2010.
6. Figure 3.6 International sources of bank lending in the United Kingdom 2004–2010.
7. Figure 3.7 Bank base rates and 5‐year swap rates 2000–2010.
8. Figure 3.8 Average interest rate margins for bank lending to commercial property 2002–2011.
9. Figure 3.9 Average interest rate margins on prime and secondary retail properties 2002–2012.
10. Figure 3.10 Differences between initial yield and funding costs 2000–2010.
11. Figure 3.11 Average maximum loan to values on commercial property lending by banks 2002–2012.
12. Figure 3.12 Office development in London 1985–2011.
13. Figure 3.13 Annual retail warehouse space completed 1993–2014.
14. Figure 3.14 Annual completions of town centre and out‐of‐town shopping centres 1965–2014.
Chapter 04
1. Figure 4.1 Annual US economic growth and commercial property returns 1978–2014.
2. Figure 4.2 Annual UK economic growth and commercial property returns 1978–2014.
3. Figure 4.3 Commercial property capital growth in selected countries 2000–2009.
4. Figure 4.4 Long‐term capital and rental value growth patterns 1975–2015.
5. Figure 4.5 Annual contributions to capital growth 1981–2007.
6. Figure 4.6 Quarterly capital and rental value growth in the retail sector 2000–2009.
7. Figure 4.7 Quarterly capital and rental value growth in the office sector 2000–2009.
8. Figure 4.8 Quarterly capital and rental value growth in the industrial sector 2000–2009.
9. Figure 4.9 Net quarterly institutional investment into commercial property, 2001–2009.
10. Figure 4.10 Net quarterly institutional investment in the UK property sectors, 2001–2009.
11. Figure 4.11 Indices of the annual real value of institutional purchases by property sector 1981–2010.
12. Figure 4.12 Indices of the annual real value of institutional sales by property sector 1981–2010.
13. Figure 4.13 Value of commercial property transaction volumes, 2000–2009.
14. Figure 4.14 Weighted average yield of property purchased by investors compared to the market average in 2006.
15. Figure 4.15 Patterns in retail sales of property fund units to investors and commercial property values, 2000–2009.
16. Figure 4.16 Yield gap between yields on gilts and commercial property, 2001–2009.
Chapter 05
1. Figure 5.1 Office yields in the United Kingdom and Western Europe 2007–2015.
2. Figure 5.2 Office yields in EMEA countries and the Americas 2007–2015.
3. Figure 5.3 Yield trends in the Asia Pacific region 2007–2015.
4. Figure 5.4 Indexed capital value and rental value change in the UK property market 2000–2014.
5. Figure 5.5 Indexed capital value change by sector, 2000–2009.
6. Figure 5.6 Contributions to capital growth, 2000–2009.
7. Figure 5.7 Peak to trough change in capital values by length of unexpired lease.
8. Figure 5.8 Peak to trough changes in capital values by asset quality defined by value.
9. Figure 5.9 Net investment by financial institutions by property sector, 2006–2014.
10. Figure 5.10 Transaction volumes in the commercial property market 2000–2015.
11. Figure 5.11 Market and valuation yields, 2007–2010.
12. Figure 5.12 Yield Spreads of Sales by Investor Types, 2007–2009.
13. Figure 5.13 Quarterly cash flow into specialist (retail) real estate funds 2000–2015.
14. Figure 5.14 Yield gap between gilts and commercial property, 2001–2009.
Chapter 06
1. Figure 6.1 Major UK banks’ customer funding gap, 2000–2008.
2. Figure 6.2 HBOS property and property related exposures, drawn balances at November 2008.
3. Figure 6.3 HBOS impaired loans as a percentage of year‐end loans and advances, 2000–2009.
4. Figure 6.4 HBOS monthly impairment losses charged to the income statement in 2008.
Chapter 07
1. Figure 7.1 Actual and forecast 10‐year gilt yield gaps, 1987–2013.
2. Figure 7.2 Actual and forecast index‐linked gilt yield gaps, 1987–2013.

This edition first published 2018
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Library of Congress Cataloging‐in‐Publication Data

Names: Jones, Colin, 1949 January 13– author. | Cowe, Stewart, author. | Trevillion, Edward.
Title: Property boom and banking bust : the role of commercial lending in the bankruptcy of banks / Colin Jones, Stewart Cowe, Edward Trevillion.
Description: Hoboken : Wiley‐Blackwell, 2017. | Includes bibliographical references and index. |
Identifiers: LCCN 2017031759 (print) | LCCN 2017043453 (ebook) | ISBN 9781119219200 (pdf) | ISBN 9781119219217 (epub) | ISBN 9781119219255 (paperback)
Subjects: LCSH: Real estate investment. | Commercial real estate. | Mortgage loans. | Financial institutions–Real estate investments. | Banks and banking. | Global Financial Crisis, 2008–2009. | BISAC: BUSINESS & ECONOMICS / Real Estate.
Classification: LCC HD1382.5 (ebook) | LCC HD1382.5 .J666 2017 (print) | DDC 332.109/0511–dc23
LC record available at https://lccn.loc.gov/2017031759

List of Figures

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

Glossary

APUT: Authorised property unit trust – a means by which personal investors can access and invest in the property market.
BASEL III: 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: 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.
NAMA: 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.
OECD: 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.
pre‐let: A pre‐let is a legally enforceable agreement for a letting to take place at a future date, often upon completion of a development.
REIT: 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.
securitization: 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).

Property Boom and Banking Bust

The Role of Commercial Lending in the Bankruptcy of Banks

List of Figures

Acknowledgements

Glossary