However, loans in breach of financial agreements doubled in the first half of 2009 to around £30billion, with £18.6billion reported in breach of covenants and £11.8billion in default – the equivalent of South Africa’s entire commercial property market.
But despite the well publicised problems of a number of key lenders, banks have retained their faith in property. The number of active banks is rising and debt is available, albeit in more limited quantity and at higher prices than previously.
While many feared large fire-sales of assets as banks called their loans in, this has not happened – yet. Since property values fell by around 45% since the peak of the boom in 2007, many were in breach of loan agreements which are set against the value of the property.
The steep and rapid drop in values meant that many property firms were, like home owners, facing a negative equity time-bomb.
De Montfort University has been publishing this survey – paid for by the UK real estate sector with the support of many of the banks which are surveyed – for a number of years and it gets more authoritative each year. The significance of the survey is not simply the sizes of the sums involved, but the level of transparency it offers to the business community.
The number of loans in breach of covenant is surprisingly small at £18.6billion – or 8.6% of the total stock of loans – but the survey is to June 2009 and states clearly that banks are much more interested in borrowers’ ability to service interest liabilities than in loan to value breaches.
The occupier market is still expected to struggle through 2010, and if tenants go under it could mean property owners being unable to service debt.
Many have been focusing on the stock of debt and the way that the banks are dealing with their problems. But the future health of the sector depends on the availability of new debt and here the news is quietly positive.
The number of banks seeking to increase loan origination to property has doubled in six months from 23% to 50% and the number of banks who are prepared to lend has risen from 73% to 87% – which suggests that while there are organisations wanting to exit the sector, banks in general continue to regard property as good collateral.
New lending this year was limited – at £7.4billion in the first half, compared to £49billion in the whole of 2008 – and is more concentrated than ever – with 12 organisations accounting for 83%. UK lenders, perhaps surprisingly, had a 58% market share.
Liz Peace, chief executive of the British Property Federation, said: "There is clearly a process underway of banks reducing their exposure to commercial property, but it seems likely to be a slow and long drawn out one.
"New originations have fallen pretty dramatically (15% in H1 of the figure for all of 2008 for loans, and 10% in H1 of the figure for 2008 for syndicated debt; 39% of respondents made no new loans at all, and 13% plan to withdraw from CRE lending altogether). At the same time, the securitisation market remains closed (so banks cannot easily sell loan books to free up their own balance sheets) – but we are also seeing extensions (£3.7billion during H1) and overall debt has remained static.
"Indeed, there are also clear signs that some banks (probably largely German and other overseas lenders) are getting more interested in commercial property again, albeit on a somewhat qualified basis (focus on prime), no doubt on the basis that values have fallen significantly and good terms (in terms of LTV safety, fees and margins) can be achieved by lenders willing to lend.
"There are also clear signs of a fairly polarised market (eg 74% of respondents prepared to lend against prime property but only 44% willing to lend against secondary). The real availability of new debt seems to be heavily concentrated in lower risk assets (few respondents are willing to offer terms for loans against developments with a significant speculative element, for example).
"While more loans are reported as being in default, it probably remains the case that lenders are willing to leave loans in place if the interest continues to be paid, even if they are in breach of financial covenants (eg the £3.7billion of extensions mentioned above)."
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