Lenders are slowly shifting a mountain of real estate debt

Outstanding UK property debt totals £299bn, but is 14% down on last year, De Montfort reveals

De Montfort’s annual snapshot of commercial property lending, published last week, shows there is still an Everest of debt. Deleveraging is slow, but there are some encouraging figures in this year’s report.

In gross terms, the debt mountain shrunk by about 14% last year, as lenders started being more active in getting bad (and good) loans off their books. New lending is on the up. Not surprisingly, most of it is safe senior debt, much of it on prime property in London and the South East (see fig 1 below).

A certain amount of junior and mezzanine debt is also being provided, with new players making an appearance. However, the appetite for lending has noticeably weakened in the past few months. Regulatory pressures and the rising cost of capital are limiting lenders’ commitment to the commercial real estate sector.

At the end of 2011, only 41% of the teams surveyed in De Montfort’s report, The UK commercial property lending market: year end 2011, intended to increase their loan books and 44% to increase the amount they originated – the lowest proportions since the end of 2008. This looks unlikely to change in the near future, De Montfort concludes.

Big six lenders hold the bulk of outstanding UK loans

The UK debt mountain: £299bn

Six lenders alone account for 60% of the total £212.3bn debt outstanding on commercial property reported to the survey. UK lenders account for two-thirds of this, while German lenders’ share rose from 11% to 12%. There is another £30.3bn of debt in CMBS, £21.5bn held by Ireland’s National Asset Management  Agency and an estimated £19.5bn held by lenders who did not take part in the survey.

Deleveraging: £31.5bn gross, £15.6bn net

The total debt outstanding is 6.8% down  on 2010. But stripping out loans originated during the year, £31.5bn had been taken off loanbooks, by 54 of the 72 lending teams surveyed. Most of the deleveraging was through scheduled amortisation, repayments and paydowns; write-offs and lender-influenced sales accounted for 22% and loan sales 14% (see fig 2 below)

  • New lending: £34.3bn in 2011

This is 8.6% up on 2010. Just over a third of lenders expanded their loanbooks, but 32% reported no new lending aside from extensions to maturing loans. The bulk of new lending (80%) was senior debt on market terms. UK lenders provided half of this and German lenders 26%, some of whom increased their loanbooks by more than a quarter. Around £6.8bn of maturing loans were extended, but De Montfort estimates there was another £3.4bn not registered by the survey.

  • Mezzanine/junior debt: £2.5bn outstanding

Traditional providers accounted for £1.5bn, but new lenders, such as debt funds, are entering this sphere. The survey included eight of these, holding a total £339m.

  • Problem loans: £19.6bn in default £22.8bn breaching covenants

The value of defaulted loans is up 28%. Lenders reported weakening cashflows causing further falls in capital values and covenant breaches. But the rate of new referrals slowed compared to previous years.

  • Margins at record highs, LTVs hit new low

Average senior debt margins were the highest recorded by De Montfort for all sectors: 300bps for prime offices and 336bps for secondary, up from 230bps and 267.5bps respectively in 2010. Average loan-to-value levels fell to new lows for all sectors: 64% for prime offices and 60% for secondary.

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