De Montfort reports first fall for UK property debt

The amount of commercial real estate debt in the UK financial system shrunk by 9.4% in 2010,  De Montfort University’s annual survey has found – the first drop in the survey’s 14-year history. The 66 lending teams reported balance-sheet debt secured by UK commercial property fell 9.4% in 2010, to £206.9bn.

This may indicate that lenders are rebuilding balance sheets and repairing the damage of their boom-time excesses. Some of the fall reflects lenders’ large-scale transfers of loans to government and other agencies; for example, Ireland’s National Asset Management Agency acquired £19bn of loans secured on UK property in 2010.

Asset sales, repayments and amortisation also helped reduce the debt mountain. De Montfort estimates that  property debt at the end of 2010, including NAMA and £47bn of CMBS loans, was £284bn-£290bn, down from £290bn-£304bn at the end of 2009. Problem loans have also shrunk. An estimated £45bn were in default or breaching financial covenants, compared with £47.6bn in 2009. But they still represent 22% of total debt.

However, liquidity fell sharply. In 2010 banks and others lent around £34bn – only £19.9bn of it in new loans and another £14.2bn in extending loans due to mature in 2010 – down from £45bn in 2009.  Just six lenders originated  two-thirds of the 2010 total. Half the lending teams surveyed intended to lend more this year. But 39% wanted to cut  their loan books and they hold £123.1bn of outstanding debt.

De Montfort also found that 70% of debt on lenders’ balance sheets is due to mature in the next five years, £144.6bn in total, with £49.5bn maturing this year. With 62% of it secured on secondary assets whose values have plummeted, it is hard to see how this debt can be refinanced.