Property debt pile shrinking, but new development finance is limited
The latest UK Commercial Property Lending Market report from De Montfort University shows that the unwinding of commercial property debt is continuing, with lenders slowly rebalancing their loan books as they reduce the value of high loan-to-value legacy debt and increase the volume of lower LTV loans.
The total amount of debt held against UK commercial property fell by 4.3% in the first half of this year to £204.1bn, the report says, with the amount of outstanding high-LTV legacy debt falling by £12bn to £94bn.
However, the report warns that the continuing economic crisis and the fact that many loans issued at the peak of the property boom in 2007 are now coming to maturity, has led to an estimated £48bn of loans being declared in breach of 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 British Property Federation adds.
The report, which covers 74 lending teams at 65 banks and other lenders, says that the estimated value of outstanding debt secured by commercial property stood at £285bn as at mid-year 2012. This figure includes the Irish ‘bad bank’ NAMA, loans secured by UK property and securitised into the CMBS market, and debt identified in non-contributing organisations, the BPF notes.
The development finance available to the sector remains very limited. Of the £11.3bn of new lending issued during H1 2012, only 5% was lent to commercial development, whereas 15% was lent to residential development, the survey finds. New lending has also focused on prime property in London and the South East.
Liz Peace, BPF chief executive, says the ongoing contraction in lending for commercial property development is a concern. “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,” she adds.
Dominic Reilly, director of Jones Lang LaSalle Corporate Finance and head of UK debt at the firm, notes that insurance companies provided 10% of the new loan originations, highlighting their growing importance as lenders to commercial property developers. “I believe that the debt funds set up in 2012 will have a positive contribution to loan originations in 2013,” he added.
Mr. Reilly also notes that the report shows that in most cases borrowers are now able to service their debt and that surplus rent after interest is available for repayment – for the first time, according to the survey, only 11% of outstanding loans have an income-to-interest cover of less than 1:1, while for 49% of loans the figure is more than 1.6:1.
