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Payback time for £55bn of property debt – De Montfort report

Over 55 billion pounds of UK commercial property debt is up for refinancing this year with around another 50 billion pounds of loans in breach of their financial covenant or in default - three times the 2008 figure.

Since around half of this owned by the two state-backed banks meaning it’s as much of a political problem as a business one. It will keep the pressure on both the new government and bankers who have been cautiously hanging on and waiting for values to rise.

The highly influential UK Commercial Property Lending Market survey by De Montfort University showed almost a quarter of loans and debt-backed securities will mature by Dec. 31.

A huge rise in defaults and distressed loans has made refinancing much harder for many businesses and as a result, the state-backed Lloyds Banking Group and Royal Bank of Scotland have become two of biggest landlords in the world, almost by accident. A 45-percent slide in commercial property values between June 2007 and August 2009 has meant that many loans now breach their original agreement.

Prime property has returned quite quickly, with British Land, Derwent London, Land Securities and Great Portland Estates all reporting positive results this week. The real estate investment trusts are all focused on high end properties with low vacancy rates and strong tenancies. There is evidence to suggest that lending to ‘top end’ property is now on the increase and that the banks are, to a small degree, back in business.

Overall, new lending has dropped by 70pc to 15.1 billion pounds last year with 12 banks holding three quarters of all new lending.

The research takes data directly from 68 lenders active in the UK commercial property market and shows loans in default have risen by more than 500pc to 19.3 billion pounds at end-2009, from 3 billion pounds at end-2008.

Liz Peace, chief executive of the British Property Federation, which represents landlords and investors, said:

“The key factor in property is leasing and regardless of what values do, if there’s a tenant paying rent the business can continue and debt can be serviced. Loans have been breached because values have fallen so far and while prime property has recovered, this is the very positive end of a market with a very long tail. But where properties that have taken big value hits still have tenants, there has been no need for banks to take them back.

“So far the banking response has been measured and sensible and they have not flooded the market with property. But there is a fear that the banks do not have the resources to fully manage the property they have inherited. Real estate is a living, breathing asset that can’t just be left on the shelf until values recover. When you consider that the state owned banks hold around £150bn of assets, this becomes a major issue for UK taxpayers. Unlike bonds, real estate cannot just be left. Tenants need to be managed and encouraged to avoid them leaving when leases expire and the properties need investment to avoid them deteriorating. If these things don’t happen then tax payers risk getting a miserly return when the banks eventually get round to selling off assets.

“Ultimately, this will be a careful balancing act that will require the banks to work closely with experts in the industry so that they release enough assets to avoid stagnation in the market but not so many and in such a way that they create a flood. It is absolutely essential that chancellor George Osborne gets a grip on the real size of the banks’ loans to commercial property and looks to engage to work with the industry to ensure the problem does not worsen.”

For more information and all PR and media queries, please contact Andrew Teacher, Head of Media, on 020 7802 0113 or 07968 12 45 45 or ateacher@bpf.org.uk. 

Summary of report

The research covers total property lending (commercial property and lending secured by social housing) of £247.7bn held by 59 lending organisations as at 30 December 2009. A total of 68 responses from individual lending teams were received which represents a 100% response rate.
Outstanding debt secured by UK commercial property only, rose from £225.5bn (2008) to £228.3bn (2009 year-end), an increase of 1.2%.
Assuming this research captures between 90% and 95% of the lending market, the market size is in the region of £240bn to £254bn without social housing at year-end 2009. A further £42.5 of loans were committed but not drawn at this date totalling £296.5bn
Around £52bn of loans secured by UK commercial property in the CMBS market at year-end 2009.
In 2010 alone, £52.6bn of debt is due to mature with an additional £2.4bn of maturing loans in the CMBS market.
However, with only £15.1bn of loans originated in 2009, the magnitude of the - potential funding gap that exists in the market is clear.
The value of loans in breach of financial covenant at year-end 2009 and reported to the research was approximately £28.3bn and represented 15.5% of the total aggregated loan book of organisations that contributed data. This compares with £18.7bn reported at mid-year 2009 and £10.7bn at year-end 2008.
With regard to loan defaults, at year-end 2009 £19.3bn of loans was reported to the research as having been declared in default during 2009. This compares with just £3bn reported to the research at year end 2008.
The combined value of loans in default and breach of financial covenant is £47.6bn and represents 21% by value of the total aggregated debt of £228.3bn reported to the research.
Lending organisation are in general retaining impaired loans on their loan books and dealing with the situation by a combination of extension and restructuring and experiencing a limited value of write-offs.
By year-end 2009 no organisation reported having transferred loans into NAMA and the use of the APS has been well documented in a UK Government publication.
At year-end 2009, 57% of loans in the aggregated loan book of £228.3bn had interest rate hedging in place.
Eighty-five percent of organisations reported as always requiring interest rate hedging to be in place when originating new loans.
The aggregated loan book of £228.3bn was, at year-end 2009, allocated 76% secured by investment property (73% at year-end 2008), 6% to commercial development (7% at 2008), 9% to residential development for sale (10% 2008), 3% owner-occupied (2% 2008) and 6% other (8% 2008).