New lending still shrinking as banks grapple with weaker income streams

New entrants have yet to fill gap left by banks not lending, while big refinancing problem remains

Banks and borrowers are far from out of the woods, with new lending continuing to fall and interest-cover defaults up, according to the latest De Montfort lending report.

New property lending for the first half of 2012 was £15.4bn, 12% less than the £17.5bn in the first half of 2011 (see fig 3). Of this, £11.3bn was loans on new deals and £3.1bn was refinancings on new market terms.

The number of respondents to the survey has risen to 82 teams at 73 organisations (eight are junior/mezzanine lenders), reflecting the trend for new debt providers to gradually come into the market.

But a significant proportion, 25 of the organisations, are not active at all in terms of new lending, though they continue to report on trends in their existing books.

Therefore, while new lenders are gradually entering the market, the aggregated value  of outstanding debt secured by UK commercial property is still falling, down 4.3% from £213.3bn at the end of 2011, to £204.1bn (see fig 4). These figures exclude social housing, NAMA’s UK loans, outstanding UK CMBS or £16.6bn of loans committed but not drawn.

In the six months, £18.7bn was sliced off lenders’ books,  about two-thirds of that due to amortisations and customers paying down, and around a third due to sales of bank loans or assets, or writedowns (see fig 5).

The enthusiasm for prime central London residential seems to be reflected in the relatively high proportion of new lending that went into residential development: 15% (see fig 1).

German lenders’ market share of the total fell from 26% to 13%, perhaps due to the fact that several German banks were not active in the UK in the first half, including Eurohypo.

The split of organisations holding all the outstanding debt has hardly changed: 65.5% of  it still sits with UK banks and building societies.

In terms of problem loans for banks and customers, the picture is mixed. On the plus side, the proportion of deals with loan- to-value ratios above 70% has fallen slightly, from 50% at the end of 2011 to 46%.

But a significant group of loans remain severely stressed, with 17% of outstanding loans ‘secured’ on assets still totally underwater (see fig 2).

With 65% LTV ratios now  top of the range for senior debt, De Montfort suggests everything with an LTV level above 70% is incapable of being refinanced, putting the amount of distressed refinancings at £94bn.

For the first time the report asked about the health or otherwise of income cover on loans. Although it cautions that the results are ‘indicative’, as only teams holding £60.6bn of debt were able to provide data, the results are alarming: 51%  of outstanding loans had cover below the 1.6x market term now and 11% had an income cover ratio of less than 1x.

While the value of loans in breach has risen only slightly to £25bn, there is a jump from 13% to 29% in breaches due to interest or principal being wholly or partly unpaid. As the report says: “It appears that by mid 2012, weakening cashflows were having a more significant impact.”

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