Property boom loans ‘coming home to roost’

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 more than 70% – the absolute maximum many lending organisations are likely to provide senior debt, rendering anything in excess potentially un-refinaceable – fell by £12billion from £106billion to £94billion, in the first six months of the year as lending organisations took affirmative action to rebalance their loan books.

However, it voices concern that 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 £48billion 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 £11.3billion 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 £11.3billion of new lending only 5% was lent to commercial development, starkly illustrating the continuing draining away of development finance to this sector. 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."

Dominic Reilly, Director of Jones Lang LaSalle Corporate Finance and Head of UK Debt, said: "The survey reveals for the first time that of loans outstanding only 11% have an income to interest cover of less than 1:1, while 49% have an income to interest cover of more than 1.6:1, indicating that in the most part borrowers are able to maintain their debt service obligations and that surplus rent after interest is available for repayment. 

"The report also points out insurance companies provided 10% of new loan originations, and I believe that the debt funds set up in 2012 will have a positive contribution to loan originations in 2013."

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