Quarter of UK commercial property debt to banks in negative equity
UK – Nearly one-quarter of UK commercial property debt to banks is now in negative equity, and £92bn (€108bn) of loans would not be refinanced in today’s market, according to a new study.
Banks now have £217bn of debt secured against commercial property in the UK, and problem loans are getting worse, academics at De Montfort University found.
In compiling their 2012 Commercial Property Lending Market report, joint authors Bill Maxted, academic consultant in the Leicester Business School at the university, and consultant Trudi Porter found commercial property lending was polarised.
Investors are active and enthusiastic in some sectors, such as central London, but one-fifth of loans on problem commercial property are in "extreme distress", they found.
According to the report, banks are cutting their exposure to commercial property debts overall, and loans are 7.7% lower than last year.
Some 23% of all debt owed to banks – worth about £45bn – have a loan-to-value (LTV) ratio of 110%, meaning borrowers are in negative equity, with the property worth less than the debt owed on it.
However, the amount of debt with a LTV ratio of 70% or less had risen slightly to 53% from the 50% registered in 2011, the report showed.
But £92bn of the lending had a LTV of 71% and would therefore fall short of standards for refinancing in today's lending market.
Maxted said: "During 2012, lending organisations reported generally that the weak UK economy and increasing incidences or tenant failures, particularly in the retail and hospitality sectors, was having a detrimental impact on borrowers' cash flows and the capital value of commercial property."
He noted a fall in the number of new impaired loans compared with the year before, but said the situation with many existing problem loans was deteriorating.
"Lending organisations had become more inclined to sell properties securing non-performing loans, with these decisions often being driven by regulatory pressure," he said.
Liz Pearce, chief executive of the British Property Foundation, welcomed the fact loan books from the 2008 peak were still being unwound, and that this was happening at a steady pace.
But she noted the increasing polarisation in the market.
"The worst property is getting worse, while there are signs of recovery at the other end of the spectrum," Pearce said.
Nearly £45.5bn loans will have to be repaid this year, and more than 70% of all commercial property loans will fall due in the next five years, the report showed.
The authors noted this was the second year in a row when lenders were unwilling to finance developments without companies committing to lease space beforehand.
The study looked at loans held by 87 lending teams from 78 banks.