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Property refinancing challenge remains for banks

Between £72.5billion and £100billion will struggle to be refinanced on current market terms when the debt matures as it has an LTV of over 70%.

The survey of 72 lending teams from 63 banks and other lending organisations found that, while 2011 started with a degree of optimism for the commercial property lending market, including the first CMBS issue since 2007, this changed dramatically during the second half of the year as the crisis surrounding the euro zone and the sovereign debt of member states brought "extremely tough times" to the economy.

Although progress has been made in addressing the legacy situation, banks still face a significant overhang of pre-recession property debt held on their balance sheets, with approximately £51billion due to mature during 2012 and a total of £153billion – 72% of outstanding debt – by year-end 2016.

Bright spots in the report show loan originations on the increase and new lenders to the market increasing their market share to 8%.

But the survey also showed a continuing draining away of development finance. Of concern for property developers is that, for the first time, no lending organisation said it would be prepared to lend against a speculative office development.

Respondents also expressed concerns about how the Financial Services Authority planned to implement "slotting", which would introduce additional regulatory capital requirements to real estate lending, suggesting the consequences of the changes would be to reduce the volume and increase the cost of business.

Bill Maxted, author of the report, said: "At the end of 2011, lending organisations were reporting that the euro zone crisis had created instability in the money markets leading to rising costs, with many banks managing their capital based on a worst case scenario both in the euro zone and the UK.

"The debt crisis is regarded as a real threat to asset values in the UK, and globally, and is a problem that has to be solved before national economies and lending markets can start to improve."

Liz Peace, chief executive of the British Property Federation, the leading body representing developers and investors, said: "Lenders continue to chip away at this legacy of property debt but the economic situation – in the UK and overseas – means they do so with one hand tied behind their backs.

"These figures underline how important it is for the Government to use all of the tools at its disposal to encourage new debt buyers into the market, and to urgently find new ways to encourage new investment and to spur economic growth.

"We would also hope that the FSA exercises extreme caution in its implementation of slotting so as not to restrict any signs of recovery in the property sector and further risk making it a less attractive place to invest."

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