Real estate lenders are granting leniency to their borrowers during the covid-19 crisis, but an improvement in market conditions will see them aggressively address issues in their loan portfolios, Knight Frank’s UK head of restructuring and recovery has said.
In a paper published by the property consultancy this month, Marc Nardini said: “Once market and economic confidence does begin to return, we expect lenders to take aggressive steps to reposition their loan portfolios, re-evaluate their risk appetite and to redeploy capital at a rate possibly not seen for over two decades.”
Nardini said lenders are currently providing breathing space due to regulations put in place by the UK’s Financial Conduct Authority, mortgage payment holidays, the risk of negative media coverage and an inability to progress some actions via the courts. However, he added that customers with existing pre-pandemic issues are under increasing pressure from lenders to perform.
He added that lenders will be waiting until transactions start completing in the different sub-markets so they can fully understand their exposure and risk on a customer-by-customer basis. The sectors most at risk of imminent enforcement action by lenders are those with existing structural challenges predating covid-19, including retail and leisure assets, leased hotels, buy-to-let portfolios and development sites.
Real Estate Capital caught up with Nardini to find out more.
Are some lenders being more lenient than others?
The larger and more stable and risk adverse lenders are providing breathing room for their customers. Those less able to provide flexibility, typically the aggressive and ‘challenger’ lenders or private offices and individuals, in comparison, appear to be taking a more active approach to recovering their stressed and distressed debt positions. However, the extent of the pressure will not be revealed until the government support for the economy and restrictions in place begin to be withdrawn and removed.
The larger lenders, such as government-backed lenders, have a bit more flexibility in terms of what they can and can’t do because they’re better resourced than maybe some of the smaller lending market which had to be in a bit more aggressive in order to get market traction. A smaller or challenger lender will be far more active with restructuring their debt as they haven’t got the flexibility that a larger clearer lender has.
Is it clear how widespread borrower issues are?
The support for the economy, government guidance and current restrictions that are all in play makes it hard to quantify borrowers’ inabilities to service their obligations. Signs of stress are apparent. The rent collection statistics posted for Scotland after the recent quarter day at the end of May are bleak and this is almost certainly to be replicated in the rest of the UK at the end of June.
We need to understand what the effects of withdrawing the government stimulus and support will have on the economy and markets. How will this affect [lenders’] customers directly and indirectly. It would certainly help if certainty and transparency returned to the markets, together with stable buyer, investor and developer sentiment.
How do you expect lenders to rebalance their portfolios?
Reducing their exposure to non-prime retail and leisure assets is arguably underway and began pre-pandemic. All lenders will take a different approach and calculate the portfolio diversification with far more scrutiny than perhaps every before. The fundamentals and basics of property, property investment and finance and risk will once again rise to the forefront.
Why do you expect redeployment of capital on a scale not seen for 20 years?
Lack of deals, a stall in the market and restricted credit sanction will mean that there will be pent up pressure to secure debt placing. Each lender will build their own individual assessment of the market performance, risk and appetite. There will be a tipping point where the majority of lenders will reach the same conclusion and begin to heavily push products in into the marketplace. At that point ‘supply and demand’ takes over.