Commerzbank has reclassified the legacy €5.2bn Eurohypo UK commercial real estate (CRE) loan book as “high risk” as part of a new three-band risk framework for its outstanding €55bn European CRE loan book, reflecting a bearish view on the outlook for property fundamentals in the UK.
Germany’s second-largest bank assessment of the renamed Hypothekenbank Frankfurt’s UK CRE loan book is based on expectations of the performance of the underlying real estate and, in turn, the securing loans.
This analysis takes into account the credit worthiness of the borrowers, the current and forecasted LTV changes of each loan over the coming quarters, as well as a probability of default estimate.
Commerzbank considers the UK as a weaker market, relative to other country exposures, with greater downside potential relative to expectations for markets such as Germany, Poland and France.
The legacy Hypothekenbank UK CRE loan book, which fell by €500m to €5.2bn over the final quarter of last year, is classified with a higher risk assessment than the CRE loan books for Italy and Portugal, on Commerzbank’s analysis, for which the remaining exposure is €2.2bn and €1.9bn, respectively.
Italy and Portugal have been reclassified as “medium risk”, while the UK is grouped alongside bank’s €3.6bn Spanish and €0.3bn Hungary CRE loan exposures.
While the majority of the legacy UK €5.2bn CRE loan book is secured against London commercial property, there is a spread of regional lending.
The majority of the remaining UK loans are performing and were written post the global financial crisis – between 2008 and November 2011 – when Commerzbank first suspended lending before transferring the entire CRE loan book into Commerzbank’s non-core assets (NCA) division, with the bank seeking a permanent exit from property lending.
Commerzbank’s bearish assessment of the UK echoes sentiments by Deutsche Bank’s research team which forecast a further 20% capital deprecation for UK secondary property over the next two to three years.
The prospects for capital and rental growth throughout the UK – and thus the performance of secured bank loans – are intrinsically interwoven with the economic prospects of the wider economy and the differing strengths of regional occupier markets.
The fragmentation of the UK commercial property market has deepened since the global financial crisis, driven by an absence of bank finance below “good secondary” assets, and geographically by the simple London versus the rest of the country divide.
Ironically, London, as a global city uniting the world as one of the premier cities for global capital flows, splits the country domestically as a result.
Commerzbank reported a fall in the overall Hypothekenbank Frankfurt CRE loan book by €5.7bn in the final quarter of last year, from €52.5bn to €47.1bn.
However, this excludes the internal migration of a pool of circa €3bn residential household mortgages which Commerzbank has transferred into the overall non-core CRE loan book.
The revised European CRE loan book – which also includes non-performing loans – reduced by €4bn to €55bn in the fourth quarter, and by €13bn over the full 2012 calendar year.
In the four years since the end of 2008, Commerzbank’s legacy Eurohypo CRE loan book has now reduced by €29bn – from €84bn to €55bn – with the German investment bank setting a target to run the loan book down to €24bn by the end of 2016, at a pace averaging at €7.75bn every year.
While the bulk of this orderly “value retaining” loan book run-down will come from a run-off of performing loans at maturity, Commerzbank has engaged Barclays Capital to determine the viability of a sale of some, or part, of the performing UK loan book.
Commerzbank and Hypothekenbank Frankfurt both declined to comment on the process, which began last September, but while there is a possibility of a sale, a number of economic, political and regulatory hurdles must be overcome for the possible to become probable.
This complexity was examined last September by CoStar News, ahead of Barclays Capital’s appointment.