Banks’ loan books slowly rebalancing

It is estimated the total value of outstanding debt secured by commercial property stood at £285bn at mid-year 2012, if further big ticket items such as Ireland’s ‘bad bank’ NAMA, loans secured by UK property and securitised into the CMBS market and debt identified in non-contributing organisations are included.

The UK Commercial Property Lending Market report by De Montfort University, the largest of its kind to look at UK commercial property lending, reports that the slow unwinding of commercial property debt is continuing. The survey of 74 lending teams from 65 banks and other lending organisations reports that debt with a LTV of over 70 per cent - the absolute maximum many lending organisations are likely to provide senior debt, rendering anything in excess potentially unrefinaceable - fell by £12bn from £106bn to £94bn, in the first six months of the year as lending organisations took affirmative action to rebalance their loan books.

However, it voices concern that the prolonged financial crisis, coupled with loans written at the peak of the property boom in 2007 now reaching maturity, has lead to an estimated £48bn of loans being declared in breach of financial covenant or in default; a situation that will deteriorate if there is a continuing decline in the capital values of the commercial property securing historic loans.

The £11.3bn of new loans, including refinancing, made during the first six months of 2012 is roughly in line with previous mid-year reports. However, there is further suggestion of a ‘flight to quality’ with new lending focusing on prime property in London and the South East.

The survey also reveals that of the £11.3bn of new lending only 5 per cent was lent to commercial development, starkly illustrating the continuing draining away of development finance to this sector. In contrast, 15% was lent to residential development.

Bill Maxted, author of the report, said: “The loan books are slowly rebalancing as lenders reduce the value of outstanding high loan-to-value legacy debt and increase the volume of loans with lower loan-to-value ratios more akin to those available in the market at mid-year 2012.”

Dominic Reilly, director of Jones Lang LaSalle Corporate Finance and Head of UK Debt, said: “The survey reveals for the first time that of loans outstanding only 11% have an income to interest cover of less than 1:1, while 49% have an income to interest cover of more than 1.6:1, indicating that in the most part borrowers are able to maintain their debt service obligations and that surplus rent after interest is available for repayment.

“The report also points out insurance companies provided 10 per cent of new loan originations, and I believe that the debt funds set up in 2012 will have a positive contribution to loan originations in 2013.”

Liz Peace, chief executive of the British Property Federation, said: “The slow unwinding of loan books continues and it’s encouraging that positive action is being taken by lenders to erode the amount of high risk legacy debt.

“Of concern for us is the ongoing contraction in lending for commercial property development. Of the £11.3bn of new lending in the first half of 2012 only 5 per cent went to development.

“While the big boys will be able to access debt from alternative providers, the rest of the market has to compete for an ever decreasing slice of the pie.”