Harris Lamb Blog – 27th June
27th June, 2011.
Why Commercial Property indebtedness is still affecting us.
By Peter Wood, Director, Investment Department.
A colleague of mine recently attended the Investment Property Forum (IPF) presentation by Bill Maxted of DeMontfort University where he talked about his latest survey on UK commercial property lending. There were some stark facts laid bare to all who attended particularly concerning levels of lending; the extent of breaches being incurred on financial covenants and some good news in that last year saw the first fall in property debt for more than a decade.
The UK Commercial Property Lending Market Survey, said that from a base of £55 billion in 1999, UK outstanding lending had grown by 18 per cent every year until 2007. Slower growth had continued in the early part of the recession but in 2010 there was a 9.4 per cent reduction.
Results of the survey showed that appox. Two thirds of respondent lenders had decreased the value of their outstanding debt while only one third had registered an increase, this was driven mainly by foreign banks.
In many cases, borrowers are being encouraged to refinance with other organizations where possible or to dispose of assets to reduce their borrowings.
Total commercial property lending in the UK probably stands at around £290 billion in total and 2010 saw this being reduced from a figure of around £305 billion in 2009.
82 per cent of lending in 2010 came from just 12 organisations with German Banks taking a far stronger position than in previous years.
Bill Maxted said “in 2009, 34 institutions indicated they intended to increase their lending, but in the event only 22 did. Credit committees were often approving only 25 per cent of viable applications due to capital rationing and taking a very selective stance.”
Research revealed that of the total loan book notified in the survey some 38 per cent was designated prime and 62 per cent secondary property.
More worryingly it was estimated that some £24 billion of loans, were in breach of financial covenants and the most common fault was crucially the loan to value covenant, which accounted for 44 per cent of the total.
In addition, the £45 billion of loans in default reduced from the £57 billion figure at the end of 2009. This was mainly due to UK property loans from the Irish banks being transferred to NAMA, which as most will know by now is the Irish government’s vehicle for handling problem debt.
After falling from average peak levels of 75-80 per cent in 2006, loan to value ratios were more stable and tended to be in the range of 60-65 per cent in 2010.
The good news in the presentation came in the comments that:-
“We are four years into a recession and financial organizations are saying it could take another five years to sort out their loan books – the light is at the end of the tunnel, but we can’t say yet how long that tunnel is.” Not a lot of good news but the end is in sight!
One of the interesting points from one of the London Finance House Directors came when he pointed out that 43 per cent of Lloyds Bank and Royal Bank of Scotland’s property loans are in “intensive care.” Quite a scary statistic too.
Those still lending were cherry picking experienced borrowers with good tenants and for these clients they are more prepared to take greater risk.
It was pointed out that two thirds of loans were coming from just six lenders and there was a greater requirement for amortisation.
It is believed that 65 per cent loan to value ratio’s should be regarded as the top end and that lenders’ credit committees felt there were still further falls (in Loan to Value ratio’s) to come.
The recovery in the commercial property market is u
nderway but still has a fair way to go. More hard work!
The likelihood is commercial property lending will be getting more expensive with shorter terms favoured by lenders and a keenness to securitise to free up balance sheets.
But then, I read today that the BBC’s Business Editor, Robert Peston, has written a piece on the Greek financial crisis under the heading “Not Europe’s Lehman (it could be worse).” Therefore, whilst micro factors in the economy are to some extent under control, the fear of us ‘catching a cold’ from somewhere else in the world certainly has not subsided.
Would you like to know more? Contact Peter on 0121 4559455 or email email@example.com.
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