Unsecuritised lending to UK real estate fell by nearly 10% to £207bn in 2010, providing a glimmer of light that bank deleveraging is working.
It is the first ever decline of total outstanding debt in 12-year history of the De Montfort University’s UK Commercial Property Lending Market Survey.
The decline amounts to £21.4bn and is the result of both effective bank deleveraging, with two-thirds of lenders reporting a decline in their outstanding loan books, and the transfer of around £10bn of property loans to Ireland’s National Asset Management Agency (NAMA).
It marks the inflexion point in a long and painful process, in which the difficult work has only just begun. More than a fifth of loans (22%), or £45bn, are either in default or breach of financial covenant.
For the first time, the De Montfort survey reported aggregated loan books prime and secondary property allocations. Across all lenders, just less than two-thirds (62%) of loans, worth £127.6bn, are secured by secondary properties, with 38%, or £79.3bn, secured by prime.
The overall debt secured against UK commercial property – including £34bn in CMBS loans and £21bn of NAMA loans – is estimated at between £284bn and £290bn.
Bill Maxted, report author, said: “There has been a measured reduction in outstanding debt that has, so far, avoided off-loading property assets to the detriment of the market and capital values. The rate of increase in impaired loans appears to be slowing and new loan originations are cautious in nature and based on conservative terms. These actions could be regarded as important first stepping stones on the path to recovery.”
But around half of this debt mountain is due for maturity within the next three years – including as much as £45.9bn in 2011 alone, up £11.2bn on last year’s estimate due to loan extensions. An additional £10.4bn of CMBS loans are due to mature by 2013 bringing the refinancing tab to £115.2bn.
With only £19.9bn of loans originated in 2010, £10.9bn of which were extensions of maturing loans. Maxted’s reports said “the magnitude of the funding gap that exists in the market is clear”.
Earlier this month, DTZ said that UK real estate debt funding gap is the highest in Europe and second largest in the world – at £25.4bn to the end of 2013.