UK Banks’ Property Boom Loans ‘Coming Home to Roost’
Debt held against UK commercial property fell 4.3% to £204.1bn during H112 supported by a £12bn reduction in the outstanding value of high loan-to-value (LTV) legacy debt, according to the latest ‘UK Commercial Property Lending Market’ report compiled by De Montfort University.
It is estimated the total value of outstanding debt secured by commercial property stood at £285bn at mid-year 2012, if further big ticket items such as Ireland’s ‘bad bank’ National Asset Management Agency (NAMA), loans secured by UK property and securitised into the commercial mortgage-backed security (CMBS) market, and debt identified in non-contributing organisations are included.
The report concludes that the slow unwinding of commercial property debt in the UK is continuing. The survey of 74 lending teams from 65 banks and other lending organisations reports that debt with a LTV of over 70% – the absolute maximum many lending organisations are likely to provide senior debt, rendering anything in excess potentially unrefinaceable – fell by £12bn from £106bn to £94bn, in H112 as lending organisations took action to rebalance their loan books.
However, the report also voices concern that the prolonged financial crisis, coupled with loans written at the peak of the property boom in 2007, which are now reaching maturity, has led to an estimated £48bn of UK loans being declared in breach of financial covenant or in default; a situation that will deteriorate if there is a continuing decline in the capital values of the commercial property securing historic loans.
The £11.3bn of new loans, including refinancing, made over H112 is roughly in line with previous mid-year reports. However, there is further suggestion of a ‘flight to quality’ with new lending focusing on prime property in London and the South East. Of this total only 5% was lent to commercial development, illustrating the continuing draining away of development finance to this sector. In contrast, 15% was lent to residential development.