Losses for lenders caused by the UK commercial property downturn are likely to rise up to £7bn in the next two years.

Research from Capital Economics says that with capital values to fall by 25-30% and rental income likely to fall, lenders to UK property and holders of commercial mortgage backed securities backed by UK property would face cumulative losses of £5bn-£7bn.

The economic research firm said that this would not be a major threat to the solvency of UK banks. Outstanding debt secured on UK commercial property is £193bn according to the Bank of England, and at 11.5% of total lending this is an all-time high.

Pray there’s no recession

But Capital Economics said that its predicted losses were equivalent to only 2-3% of of banks’ Tier 1 (low risk, highly liquid) capital, so would not pose a major threat.

However, it added: ‘If the economy falls into recession, capital values could fall by 40% and losses on commercial property debt rise to a far more problematic figure of around £18bn. But for now that remains a worst case scenario.

‘Indeed, since residential mortgage debt is four times as large as commercial, high loan-to-value ratios aree more prevalent and the relaxation in lending criteria in recent years is probably more marked, the bigger headache for lenders could come from the emerging housing market downturn.’