Eurozone crisis adds to debt refinancing challenge for property
The uncertainty triggered by the deepening eurozone crisis and the lack of growth in the UK economy has exacerbated the ongoing lack of liquidity and increasing costs of capital in the property lending market, finds the latest report from De Montfort University on UK commercial property lending.
The report’s joint author, Bill Maxted, said: “Lending organisations commented that the existing liquidity crisis had been made more acute by the problems of European sovereign debt and the unknown extent of contagion between banks.”
“Respondents have suggested that only an increase in confidence in the UK economy, demonstrated by a number of quarters of sustained growth in UK GDP, would signal a recovery in the commercial property market in the UK.”
The most recent in this series of influential reports, published today, looks at the debt held against UK commercial property during the first half of 2011. It says the value of outstanding, on-balance-sheet debt fell by 3.4% to £201.3bn in the six months to June 2011, from £208.4bn at the end of December 2010, but warns that property lenders face significant challenges ahead.
In particular, the report says that about half of this debt – between £85bn and £114bn – cannot be refinanced on the terms available in the market at the mid-point of 2011, and a quarter of the debt is secured on a loan-to-value ratio of more than 100%, as a result of falling investment values. Only 21% of the debt had an LTV ratio of less than 60%.
The report also shows the contraction in the lending market – while 66% of lenders said they were prepared to lend against commercial property, only 35% were intending, as of mid-2011, to increase the size of their loan books. This compares with 46% at the end of December 2010. Almost all of those willing to lend (64% of respondents overall) would do so against a prime office property, compared with just 29% for a loan secured by a secondary office.
Unsurprisingly, respondents were most positive towards the property markets in London and the South East, which were seen as being in recovery mode, while it was considered that a recovery in regional markets could take six years or even longer.
The report also highlights the difficulties facing developers who are seeking financing. Only 31% of respondents were prepared to lend against a fully pre-let development, compared with 52% in the previous survey, and the proportion willing to lend against speculative development fell to 15% from 17%.
Liz Peace, chief executive of the British Property Federation, commented that the figures demonstrated that the government needed to use “all of the tools at its disposal” to tackle the overhang of property debt. She said it should encourage new debt buyers into the market, helped by reform of the REIT regime to allow the creation of mortgage REITs, and urged the government to stop charging full business rates on empty commercial properties – “something that is a considerable disincentive for landlords who wish to invest in premises for small and medium firms”.
