£114bn of UK property loans now ‘cannot be refinanced’

By Erikka Askeland
Published on Saturday 10 December 2011 00:00

INVESTORS in UK commercial property will face huge difficulty in refinancing more than £100 billion worth of outstanding bank loans amid tightening credit conditions, a new report has warned.

The effects of the eurozone crisis risk destabilising the banks’ management of their UK commercial property loans, which has so far prevented “fire sales” and the collapse of the property market, it added.

The UK Commercial Property Lending Market survey by De Montfort University highlighted the fragility of the market, claiming one-quarter of all loans – up to £28.5bn – are now worth more than the assets they back,

Some 33 per cent of all loans are being treated with “forbearance” by banks, the survey said.

The researchers said that about £85bn to £114bn worth of loans “could not be refinanced on current market terms”, as the British Property Federation (BPF) called on the UK government to relax rules to allow new lenders into the market.

The study, the largest of its kind into commercial property debt, estimated total lending of between £280bn and £292bn on 30 June, down from £288bn to £298bn at 31 December..

Liz Peace, chief executive of the BPF, 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.”

She added: “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 firms.”

Since 2009, banks have been actively involved in a “measured” reduction in debt, which had so far avoided a fire sale of property assets and a collapse in capital values, De Montfort said.

But the uncertainty triggered by the deepening eurozone crisis and the lack of growth in the UK economy has exacerbated the on-going lack of liquidity and increasing costs of capital in the property lending market.

The report also focused on regional disparities – with London and the south-east of England seen as being in “recovery mode” – the provincial markets could take six years or perhaps longer, with “much pain during this period” expected.

Bill Maxted, co-author of the report, said: “Respondents have suggested only an increase in confidence in the UK economy, demonstrated by a number of quarters of sustained growth in GDP, would signal a recovery in the commercial property market in the UK.”

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