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Commercial Property News
Cost of unwinding interest rate swap deals is holding up banks from cleaning commercial property loan books
Banks face up to £10 billion of costs to unwind interest rate swaps on commercial property debt, deterring them from the quick sale of property assets to clean up loan books, research by Savills showed today.
Savills linked its figure for the cost of unwinding swaps to research by De Montfort University showing 57% of the £250 billion UK loan book at end-2009 had an interest rate hedge in place.
However it did not give any further detail of how the £10 billion number had been calculated.
Savills' head of valuation, William Newsom, said the market had been surprised by the rate at which interest rates fell during the global financial crisis, this tumble pushing up the cost for banks to unwind swaps.
"The good news is that whilst banks are cautious, they continue to focus on working with core customers (and) new lending organisations are emerging, attracted to the market by the favourable lending conditions," Newsom said.
A swap involves agreeing a fixed interest rate for a period of time. If the loan is to be restructured in the intervening period, the issuer is liable for the difference between what interest they pay on the swap and the market level.
Newsom said in a statement swaps took priority over senior debt if banks were to sell properties free of debt.
Citing the De Montfort University research, Savills said that, in the period 2010-12, 53% of total loan books were due to mature at £120.7 billion.
This "suggests that lenders will continue to focus on restructuring loans with core customers and refinancing where possible," Savills said, noting the margin between property yields and the cost of money on new debt was now 5%.
Savills linked its figure for the cost of unwinding swaps to research by De Montfort University showing 57% of the £250 billion UK loan book at end-2009 had an interest rate hedge in place.
However it did not give any further detail of how the £10 billion number had been calculated.
Savills' head of valuation, William Newsom, said the market had been surprised by the rate at which interest rates fell during the global financial crisis, this tumble pushing up the cost for banks to unwind swaps.
"The good news is that whilst banks are cautious, they continue to focus on working with core customers (and) new lending organisations are emerging, attracted to the market by the favourable lending conditions," Newsom said.
A swap involves agreeing a fixed interest rate for a period of time. If the loan is to be restructured in the intervening period, the issuer is liable for the difference between what interest they pay on the swap and the market level.
Newsom said in a statement swaps took priority over senior debt if banks were to sell properties free of debt.
Citing the De Montfort University research, Savills said that, in the period 2010-12, 53% of total loan books were due to mature at £120.7 billion.
This "suggests that lenders will continue to focus on restructuring loans with core customers and refinancing where possible," Savills said, noting the margin between property yields and the cost of money on new debt was now 5%.
Wed, 9th Jun 2010