There was a 4.3% fall in the value of debt held against UK commercial property to £204.1 billion during the first half of 2012, according to a key property survey out today.
This was supported by a £12 billion reduction in the outstanding value of high loan-to-value legacy debt.
It is estimated the total value of outstanding debt secured by commercial property stood at £285 billion at mid-year 2012, if further large 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% – the absolute maximum many lending organisations are likely to provide senior debt, rendering anything in excess potentially unrefinaceable – fell by £12 billion from £106 billion to £94 billion, in the first six months of the year.
There is concern that this means 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 £48 billion 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 £11.3 billion 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 £11.3 billion of new lending only 5% was lent to commercial development. 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.”
Liz Peace, chief executive of the British Property Federation, added: “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 £11.3 billion of new lending in the first half of 2012 only 5% 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.”