De Montfort report warns half of UK property debt 'can not be refinanced'
By Helen Roxburgh - Friday, December 09, 2011 9:12
Debt held against UK commercial property fell by 3.4% in the first half of 2011, according to the influential De Montfort Report.
The mid-year UK Commercial Property Lending Market report by the university sound that the level of outstanding, on-balance-sheet debt fell from £20.8.4bn to £201.3bn in the six months to June 2011.
However, the report warned that around a half of the debt, in a range of £85bn-£114bn, can not be refinanced on current market terms and that a quarter is secured on a loan-to-value ratio of more than 100%.
De Montfort warned that 41% - 56%, or £84 to £114bn, of loans “may not be refinancable on lending terms available in the market at mid-year 2011” and falling investment values meant that 24% had a LTV ratio of above 100%, while just one fifth (21%) had an LTV ratio of less than 60%.
The debt levels include around £46bn outstanding in the CMBS market, and circa £19.9bn held in Irish ‘bad bank’ NAMA.
The report said that the deleveraging of the industry had continued at a “modest pace”, and had so far avoided a fire sale of property assets.
But, uncertainty triggered by the deepening Eurozone crisis and the lack of growth in the UK economy had exacerbated the ongoing lack of liquidity and increasing costs of capital in the property lending market.
The market has continued to contract through the year, although two-thirds of lenders questioned said that they were still prepared to lend against commercial property. However, the proportion intending to increase the size of their loan books fell from 46% to 35% at mid-year level.
64% of respondents said they would lend against a prime office property – only 29% said they would lend against a secondary office.
Bill Maxted, co-author of the report, said: “Lending organisations commented that the existing liquidity crisis had been made more acute by the problems of European sovereign debt and the unknown extent of contagion between banks.
“Respondents have suggested that only an increase in confidence in the UK economy, demonstrated by a number of quarters of sustained growth in UK GDP, would signal a recovery in the commercial property market in the UK.”
A regional divide was also highlighted by the report, with London and the South East seen as being in “recovery mode” with an “enormous” gap between the capital and the provincial markets, which could “take six years or perhaps longer” to recover.
Development financing also remains very difficult to secure, with only 31% willing to lend against a fully pre-let development, and only 15% willing to lend on speculative developments.
Liz Peace, chief executive of the British Property Federation, said: “These figures underline how critically important it is for government to use all of the tools at its disposal to help tackle this overhanging property debt.
“This means encouraging new debt buyers in to the market – something that we think reform of the real estate investment trust regime to allow the creation of mortgage reits would help to achieve.
“It also means finding ways to encourage new investment and spur economic growth. One easy way would be to stop charging full business rates on empty commercial properties, something that is a considerable disincentive for landlords who wish to invest in premises for small and medium firms.”
Read more on the UK Commercial Property Lending Market survey, on the De Montfort University website
hroxburgh@costar.co.uk