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The decade-long lending boom to the commercial property industry has officially come to an end, with outstanding debt to the sector showing a decline for the first time since records began in 1999, after growing to £224bn.
Evidence of the legacy of the unrestrained lending practices during the peak years of the property market is emerging, however, with a threefold increase in loan defaults and a doubling of loans in breach.
In total, more than £30bn of loans are now in trouble, according to De Montfort University, which compiles the most accurate data on the sector, although there would be far more if it had not been for banks restructuring problem loans or extending maturing debt where possible.
With a lack of cash available to repay loans among property investors, and the reluctance among banks to force loans into default owing to the impairments that they would then have to make to their own books, many institutions are ignoring breaches and simply extending the life of loans.
Of the £7.4bn of loans made in the first half of the year - less than 10 per cent of the £83bn of loans completed in 2007 - more than half was committed to refinancing old debt. There was an additional £12.3bn of lending estimated as restructuring and extending existing loans.
The level of defaults in securitised debt - off the balance sheet of UK lenders - is also rising fast.
The largest default in the UK to date has been the £1.1bn White Tower securitisation, with properties backed by the debt such as 60 Victoria Embankment and Aviva Tower being lined up for disposal.
Lending intentions have improved, however, showing that some banks are hoping to return to a market that is showing some signs of patchy recovery, particularly for the best quality of properties.
The overall size of the commercial property market stood at £300bn at the end of the first half of this year, according to De Montfort, when including social housing and about £50bn of debt that has been securitised and moved off balance sheet for lenders.
Liz Peace, chief executive of the British Property Federation, said: "[The research] shows that banks are starting to take the necessary actions that will allow them to move on and begin lending to the sector again.
"Banks lent on the wrong types of properties at the wrong terms in the boom, but now it will be back to safe investments only."
There are record-level fees being asked in a market still starved of debt, with investors having to agree to high interest rate margins and low loan-to-values. This is reflected in positive attitudes to commercial property lending in the UK among 87 per cent of organisations.
Even so, the level of breaches and defaults soared in the first half as borrowers saw the value of properties slump in relation to the debt used to buy them. The analysis comes as two more property portfolios, sold by RBS for £175m in 2005 and 2006 to Joseph Ackerman, the private investor, were this week put into receivership following default.
The combined value of impaired loans of £30.5bn represents almost 14 per cent of the outstanding debt, more than twice the £13.8bn of loans in similar difficulty at the end of 2008.
News source : http://www.ft.com
