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Commercial Property News
Another report highlights the UK commercial property finance logjam we are heading into.
The value of UK commercial real estate debt in default or in breach of key lending agreements more than doubled to about £30billion in the first six months of the year, posing a growing threat to Britain's banking sector revival,, a survey has revealed.
The UK Commercial Property Lending Market survey from De Montfort University, published today, showed debts breaching covenants soared by 75% to £18.7 billion in the first half of 2009 and that stressed loans represented around 8.6% of the aggregate loan book of the 56 lenders surveyed at end-June.
Bill Maxted, author of the report, said: “The first half of 2009 has seen the UK commercial property lending market begin to experience the impact of the global financial crisis that started rumbling during 2007 and reached a crescendo in the autumn of 2008.”
The report, seen by the real estate sector as a benchmark indicator of UK property lending conditions, is likely to sound alarm bells for bank investors who hoped the worst of property-related impairments were past.
Hampered by falling prices and picky buyers, under-pressure banks have barely dented their vast UK commercial property exposure in the first six months of 2009, the research showed.
Banks have also extended or refinanced an extra £16billion in the first-half of the year, rolling over maturing debt that could not be paid back by cash-strapped borrowers or restructuring loans when breaches were threatened owing to the steep fall in values.
This strategy has been dubbed “extend and pretend”, with some banks even refusing to test loan covenants, given a reluctance to crystallise losses by selling the property asset or the debt attached to it.
The survey shows a tough refinancing schedule for property investors, with £43billion of loans due to mature this year and £32billion due for repayment in each of the next two years, although much of this is expected to be rolled over.
Mr Maxted said: “This paints a picture of a lending market that has almost ground to a halt and the future activity of which is totally constrained by a debt burden of approximately £106billion that is due for repayment by the end of 2011.” The “log jam” created by this overhang of maturing debt impossible to refinance in the current market will leave a legacy that may take years to work through, he said.
The good news for the banking sector is that fees and margins are at record levels.
Lloyds Banking Group for instance has been particularly hard hit by massive losses on commercial property.
But Lloyds said in August its bad debts peaked in the first half, largely because it had taken a tough valuation of real estate assets badly hit in the credit crunch, lifting optimism it was through the worst.
According to the report, the aggregate value of outstanding debt secured by UK commercial property has shrunk by 0.6% to £224.1 billion, leaving the total size of the specialist commercial property market unchanged at £300 billion (including £50 billion of commercial mortgage-backed securities debt).
Just over half of banks surveyed said they had taken action to accelerate the repayment of loans worth a total £11.8 billion during the first six months of 2009, but new lending remains piecemeal and costly.
A total of £7.4 billion of loans were originated in the first half of the year, equivalent to around 15% of all lending in 2008. Some £3.5 billion of these loans were new business, with the remainder loan refinancings, 58% of which was completed by just five organisations and 83% by a total of twelve organisations.
The proportion of banks hoping to increase loan originations more than doubled to 50% in the first half of 2009 but this optimism was offset by findings that 13% of banks planned to pull out of commercial property lending entirely.
Almost two-fifths of banks chose not to extend any new loans between December 2008 and end-June even though a two-year downturn in commercial property values started to slow in the second quarter.
This number was up from the previous high of 26% recorded at mid-year 2008 and highlighted a continued lack of bank confidence in Britain's real estate outlook.
Lenders said they intended to syndicate or securitise around £6.4 billion of loans in the first half of 2009 but failed to do so because of adverse market conditions, severely restricting the amount of capital available for new lending.
However, banks remained highly selective about new business, the report showed.
Almost three-quarters of the banks' participating in the research said they would be prepared to offer loans secured by prime investment property but just 44% said they were prepared to consider loans on secondary investment property.
Less than 15% would offer mezzanine finance on investment property compared with 24% in mid-2008.
The UK Commercial Property Lending Market survey from De Montfort University, published today, showed debts breaching covenants soared by 75% to £18.7 billion in the first half of 2009 and that stressed loans represented around 8.6% of the aggregate loan book of the 56 lenders surveyed at end-June.
Bill Maxted, author of the report, said: “The first half of 2009 has seen the UK commercial property lending market begin to experience the impact of the global financial crisis that started rumbling during 2007 and reached a crescendo in the autumn of 2008.”
The report, seen by the real estate sector as a benchmark indicator of UK property lending conditions, is likely to sound alarm bells for bank investors who hoped the worst of property-related impairments were past.
Hampered by falling prices and picky buyers, under-pressure banks have barely dented their vast UK commercial property exposure in the first six months of 2009, the research showed.
Banks have also extended or refinanced an extra £16billion in the first-half of the year, rolling over maturing debt that could not be paid back by cash-strapped borrowers or restructuring loans when breaches were threatened owing to the steep fall in values.
This strategy has been dubbed “extend and pretend”, with some banks even refusing to test loan covenants, given a reluctance to crystallise losses by selling the property asset or the debt attached to it.
The survey shows a tough refinancing schedule for property investors, with £43billion of loans due to mature this year and £32billion due for repayment in each of the next two years, although much of this is expected to be rolled over.
Mr Maxted said: “This paints a picture of a lending market that has almost ground to a halt and the future activity of which is totally constrained by a debt burden of approximately £106billion that is due for repayment by the end of 2011.” The “log jam” created by this overhang of maturing debt impossible to refinance in the current market will leave a legacy that may take years to work through, he said.
The good news for the banking sector is that fees and margins are at record levels.
Lloyds Banking Group for instance has been particularly hard hit by massive losses on commercial property.
But Lloyds said in August its bad debts peaked in the first half, largely because it had taken a tough valuation of real estate assets badly hit in the credit crunch, lifting optimism it was through the worst.
According to the report, the aggregate value of outstanding debt secured by UK commercial property has shrunk by 0.6% to £224.1 billion, leaving the total size of the specialist commercial property market unchanged at £300 billion (including £50 billion of commercial mortgage-backed securities debt).
Just over half of banks surveyed said they had taken action to accelerate the repayment of loans worth a total £11.8 billion during the first six months of 2009, but new lending remains piecemeal and costly.
A total of £7.4 billion of loans were originated in the first half of the year, equivalent to around 15% of all lending in 2008. Some £3.5 billion of these loans were new business, with the remainder loan refinancings, 58% of which was completed by just five organisations and 83% by a total of twelve organisations.
The proportion of banks hoping to increase loan originations more than doubled to 50% in the first half of 2009 but this optimism was offset by findings that 13% of banks planned to pull out of commercial property lending entirely.
Almost two-fifths of banks chose not to extend any new loans between December 2008 and end-June even though a two-year downturn in commercial property values started to slow in the second quarter.
This number was up from the previous high of 26% recorded at mid-year 2008 and highlighted a continued lack of bank confidence in Britain's real estate outlook.
Lenders said they intended to syndicate or securitise around £6.4 billion of loans in the first half of 2009 but failed to do so because of adverse market conditions, severely restricting the amount of capital available for new lending.
However, banks remained highly selective about new business, the report showed.
Almost three-quarters of the banks' participating in the research said they would be prepared to offer loans secured by prime investment property but just 44% said they were prepared to consider loans on secondary investment property.
Less than 15% would offer mezzanine finance on investment property compared with 24% in mid-2008.
Fri, 4th Dec 2009