Britain's banks risk losing £7 billion from the falling value of the country's office, shop and industrial buildings stock over the next two years and write-offs could balloon to £18 billion if the economy slides into recession.

The forecast from Capital Economics comes as investors and lenders to Britain's £450 billion of commercial property are reeling from an average fall of 15 per cent in the value of buildings since last June, according to industry figures.

However, Capital Economics believes that prices may fall by the same amount again by the end of next year, bringing the total decline to 30 per cent from their peak. Capital believes that there is a one-in-five chance of a recession, which could trigger 40 per cent falls in average prices.

The bearish forecasts were given added weight this week by a profits warning from DTZ, one of the world's largest commercial property agencies. DTZ is concerned that a recent pick-up in building sales has petered out and that rental demand for new space, which had remained strong, is on the verge of collapsing.

Prices of commercial property have slumped since the summer and the onset of the credit crunch. The withdrawal of the banks from the lending market has pulled the rug from the investor market.

Banks have typically lent on loan-to-value ratios of 80 per cent and if the slide in property prices continues into the second half of the year, many investors will be in breach of loan covenants and might find it hard to refinance their debt. This could force bank lenders but also owners of commercial mortgage-backed securities to take collectively between £5 billion and £7 billion of losses when investors are forced to sell buildings.

A 40 per cent price fall by the end of 2009 would trigger about £18 billion of losses but Ed Stansfield at Capital Economics called that “a worst-case scenario”.

For the five years to July 2007, commercial property investors have had relatively easy access to cheap debt, with the record £193 billion at the end of last year representing 11.5 per cent of all outstanding bank debt, according to Bank of England figures.

HBOS, HSBC, Royal Bank of Scotland and Barclays are among the biggest lenders to the market.

High risks

— £450 billion total value of UK commercial property, excluding government assets

— £193 billion bank debt secured against UK commercial property

— 14 per cent average fall in value for all UK property from June 2007 to March 2008

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