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Lending to property polarised in ‘two-speed Britain’

wantspacegotspace.co.uk - Lending to property polarised in ‘two-speed Britain’The UK commercial property lending market is becoming increasingly polarised between the big ticket lenders – dominated by overseas banks – and the UK lenders whose appetite is being restricted by non-performing legacy loans.

Speaking at the Birmingham launch of the De Montfort UK Commercial Property Lending Market Survey, co-author Bill Maxted also revealed continued falls in the value of the worst performing assets, underlining the increasing polarisation in the property market and the wider economy.

The Investment Property Forum meeting, hosted by law firm DLA Piper and chaired by David Smith of Strata Real Estate was advised that debt held against UK commercial property stood at £197.9bn at the end of 2012, a year-on-year fall of 7.7 per cent and back below 2007 levels.

That increases however to £268bn when adding the £8.5bn attributed to Ireland’s ‘bad bank’ NAMA, outstanding securitised loans of £38bn and other big ticket items.

Whilst the unwinding of commercial property debt continues at a steady pace from the 2008 peak, the survey points to a growing polarisation between good quality and bad quality assets. Sub prime property, particularly outside London and the South East, remains out of favour with investors in part due to the unwillingness of lenders to provide new loans secured against this property. However, increased competition among lenders for the least risky loans has pushed down borrowing costs for the best quality assets.

The survey of 78 lending organisations reports that the decline in capital values of secondary and tertiary properties in particular pushed the proportion of outstanding debt considered to be in severe distress – with a loan-to-value (LTV) ratio exceeding 100 per cent – to £45bn, or 23 per cent of the total outstanding debt.

At the same time the proportion of debt with an LTV ratio of 70 per cent or less stood at 53 per cent, an improvement compared with 50 per cent at year-end 2011. In all £92bn had an LTV above 70 per cent, meaning that in today’s lending market, it would be unlikely that these loans could be refinanced.  

The report also highlights that whilst new non-traditional lenders are becoming more active, their appetite remains selective and shows a clear bias towards prime investment properties in central London.

During 2012 lending for new property transactions totalled £25.4bn compared to £27.5bn in 2011. Loan originations were back to their 2002 level and considerably lower than the peak of £83.7bn in 2007.

Average maximum LTVs for prime offices remained constant at 64 per cent in 2012, compared to their peak of 83 per cent in 2005. At the other end of the scale, average maximum LTVs for secondary industrial properties was 56 per cent, decreasing from 59 per cent in 2011 and a peak of 74 per cent in 2006.

The proportion of new lending by the top twelve organisations in 2012 fell slightly to 72 per cent, compared to 74 per cent in 2011 and 82 per cent in 2010. The top six lenders however accounted for 57 per cent of new loans compared to 59 per cent in 2011.

Mr Maxted commented, “With debt funds accounting for just one per cent of outstanding property loans and five per cent of lending activity during 2012, they are unlikely to be a silver bullet in solving the credit drought where it is most acute: commercial property development projects and the regions generally”.

Over the next five years 72 per cent of the £197.9bn outstanding commercial property debt is due for repayment. This equates to £143bn, of which £45.5bn matures this year.

For the second successive year, no organisation was prepared to offer terms for speculative commercial development. Only 5 per cent, or just over £1bn of new lending last year related to pre-let commercial development projects.
Mr Maxted added, “During 2012, lending organisations reported generally that the weak UK economy and increasing incidences of tenant failures, particularly in the retail and hospitality sectors, was having a detrimental impact on borrowers’ cash flows and the capital value of commercial property.

There was a reduction in the year-on-year number of new impaired loans but the situation with many existing problem loans is deteriorating. Lending organisations have become more inclined to sell properties securing non-performing loans with these decisions often being driven by regulatory pressure”.

Responding to the De Montfort survey, William Maunder Taylor, director at Kingfisher Property Finance argued that the market is becoming increasing polarised between sub £20m and bigger ticket loans. He commented, “UK banks and building societies are the only lenders providing debt under £20m, and they have been hit the hardest by regulation and legacy issues. There is a lack of competition in this part of the market and every indication that LTVs will remain low and interest margins high”.

Mr Maunder Taylor added, "Banks are reporting to De Montfort that the regions are not receiving their fair share of new lending, although that has not fed through yet in the data. Lending is still concentrated in London and the south east”.

The Bank of England’s view is that legacy issues are cluttering up the balance sheets of UK banks resulting is reduced lending capacity. Central bankers also argue that the new regulations have brought confidence and stability to the market.

UK banks however cite that these regulations are the cause of reduced lending in the regions, and also restricting lending activity against secondary property. Mr Maunder Taylor suggested that there is evidence to support both views.

Fiona Thomson, Head of Real Estate for the Birmingham office of global law firm DLA Piper, commented, “I am optimistic that non-bank lenders will increase activity in the regions during the coming year and the Midlands has the chance to play a leading role in driving this.
Organisations such as Business Birmingham and the LEP have been working hard, in partnership with the private sector, to develop a very focused strategy to maximise the Midlands' appeal to investors and this is finally having an impact.

Funders are getting on the train and coming out of London to visit us and seriously explore their options. Although this has not yet filtered through to De Montfort's research results, it is laying the foundations for a resurgence of deal activity in the regions."

Posted by The Editor (wantspacegotspace) on 24th June 2013 (updated 01/07/2013)

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