Over £55bn of UK commercial property debt is up for refinancing this year with around another £50bn of loans in breach of their financial covenant or in default, which is three times the 2008 figure. The two state-backed banks own around half of this, which means that it is as much of a political problem as a business one. This situation will keep the pressure on both the new government and the bankers who have been cautiously hanging on and waiting for values to rise.
The UK Commercial Property Lending Market survey by De Montfort University showed that almost a quarter of loans and debt-backed securities will mature by 31 December 2010.
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 (Lloyds) and Royal Bank of Scotland (RBS) have become two of biggest landlords in the world, almost by accident. A 45% slide in commercial property values between June 2007 and August 2009 has meant that many loans now breach their original financial agreements. However, those with paying tenants have been able to ride the storm.
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 70% to £15.1bn 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 500% to £19.3bn at end-2009, from £3bn at end-2008.
Liz Peace, chief executive officer (CEO) 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,” she added.
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