Banking on Real Estate

Abstract

Commercial real estate has always been a cyclical industry, but the boom and bust of the last 10 years has been remarkable in at least two respects. One was its global coverage. Figure 1 illustrates the global character with nominal rental values for offices in Boston, London, Madrid, Melbourne, Milan, Paris, Stockholm and Zurich. Another feature of the cycle was the extent to which banks increased their exposure to commercial real estate. Against the backdrop of a rapid expansion of total loans and advances, banks' lending to construction companies and property development companies increased even faster. Figure 2 shows, for a number of countries, direct loans by banks for commercial real estate development as a share of all bank loans. Note that the data do not include banks' indirect lending to commercial property development, which occurs when they make loans to finance companies and other financial institutions (in some cases subsidiaries of the banks) which then on-lend the funds for commercial real estate.