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UK commercial property debt stands at GBP224bn

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Debt secured by the UK real estate sector has fallen for the first time on record by 0.6 per cent from GBP225.5bn at year-end 2008 to GBP224.1bn at mid-year 2009, according to a study of bank lending to commercial property by De Montfort University.

However, loans in breach of financial agreements doubled in the first half of 2009 to around GBP30bn, with GBP18.6bn reported in breach of covenants and GBP11.8bn in default – the equivalent of South Africa’s entire commercial property market.
 
But despite the well publicised problems of a number of key lenders, banks have retained their faith in property. The number of active banks is rising and debt is available, albeit in more limited quantity and at higher prices than previously.
 
While many feared large fire-sales of assets as banks called their loans in, this has not happened yet. Since property values fell by around 45 per cent since the peak of the boom in 2007, many were in breach of loan agreements which are set against the value of the property.
 
According to the survey, which is paid for by the UK real estate sector with the support of banks, the number of loans in breach of covenant is surprisingly small at GBP18.6bn, or 8.6 per cent of the total stock of loans. However, the survey is to June 2009 and states that banks are much more interested in borrowers’ ability to service interest liabilities than in loan to value breaches. Added to this, with RBS now in the Asset Protection Scheme, the National Assets Management Agency up and running and Lloyds about to complete its rights issue, it would be reasonable to expect the number of defaults to increase significantly.
 
The occupier market is still expected to struggle through 2010, and if tenants go under it could mean property owners being unable to service debt.
 
The number of banks seeking to increase loan origination to property has doubled in six months from 23 per cent to 50 per cent and the number of banks that are prepared to lend has risen from 73 per cent to 87 per cent, which suggests that while there are organisations wanting to exit the sector banks in general continue to regard property as good collateral.
 
New lending this year was limited – at GBP7.4bn in the first half compared to GBP49bn in the whole of 2008 – and is more concentrated than ever with 12 organisations accounting for 83 per cent. UK lenders had a 58 per cent market share.
 
Liz Peace (pictured), chief executive of the British Property Federation, says: “There is clearly a process underway of banks reducing their exposure to commercial property, but it seems likely to be a slow and long drawn out one. New originations have fallen pretty dramatically (15 per cent in H1 of the figure for all of 2008 for loans, and ten per cent in H1 of the figure for 2008 for syndicated debt; 39 per cent of respondents made no new loans at all, and 13 per cent plan to withdraw from CRE lending altogether). At the same time, the securitisation market remains closed (so banks cannot easily sell loan books to free up their own balance sheets) – but we are also seeing extensions (GBP3.7bn during H1) and overall debt has remained static.
 
“Indeed, there are also clear signs that some banks (probably largely German and other overseas lenders) are getting more interested in commercial property again, albeit on a somewhat qualified basis (focus on prime), no doubt on the basis that values have fallen significantly and good terms (in terms of LTV safety, fees and margins) can be achieved by lenders willing to lend.
 
“There are also clear signs of a fairly polarised market (e.g. 74 per cent of respondents prepared to lend against prime property but only 44 per cent willing to lend against secondary).  The real availability of new debt seems to be heavily concentrated in lower risk assets (few respondents are willing to offer terms for loans against developments with a significant speculative element, for example).”

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