Banks’ UK commercial property loans at risk of loss were less than £7bn at the end of last year, reflecting just 4% of the outstanding £170bn of debt captured by the latest annual De Montfort property lending survey.
This £6.88bn figure is based on a subset of £170bn out of the De Montfort survey’s £197.9bn captured at the end of 2012 and contrasts with the £9.55bn equivalent identified by CoStar News last May, based on De Montfort’s end of year 2011 survey which captured £212.3bn in outstanding UK property debt.
On which basis, the total amount of banks’ UK commercial property loans held by banks which are at risk of loss based on current-marked LTVs, has fallen by £2.67bn, or 27.9%, over the 12 months to the end of 2012.
While there is a crucial caveat here – that the sample size for this subset of each year’s annual survey has fallen year-on-year by £20bn to £170bn.
However, the broader point – and, indeed, purpose of this alternative analysis of De Montfort’s widely-referenced annual property lending survey – is to illustrate that the banking system continues to, not without significant loan impairment provisions, gradually work through the legacy of profligate lending which began almost a decade ago.
Equivalent analysis in each of the next three years, in all likelihood, would demonstrate a further run-down of these worst case fears.
How is the £6.88bn loans at loss figure reached?
De Montfort asks survey respondents to categorise its UK property loan book by its LTV profile, divided into six bands. However, only respondents which collectively account for £170bn of this year’s £197.9bn total, answered this question in the survey.
According to the survey, then, 23% of this £170bn is comprised of UK property loans above 100% LTV, which equates to £39.1bn.
The LTV composition of this £39.1bn of UK commercial property debt is as follows:
- 9% of loans, or £15.3bn, are at LTVs between 101% and 120%;
- 14% of loans, or £23.8bn, are at LTVs at 121% and above.
The balance of the £170bn of UK property debt which is marked below 100% LTV – which is £130.9bn across the four remaining De Montfort-defined LTV bands – should not pose any risk of loss to banks, and other lenders, as a sale at the level of the total outstanding debt would see banks’ recover their principal.
That is, less negligible transaction costs covering the receivership process, as well as agency and legal fees.
Taking, then, the median point between the 101% and 120% LTV bracket – 110% – only £1.39bn of the outstanding £13.9bn is at risk of loss.
The remaining £12.51bn worth of secured outstanding debt, logically would be returned to banks if loan enforcement or consensual assets sale was actioned, assuming an orderly sale at assets’ carrying value.
For the second component – the 14% of loans above 121% LTV – based on an assumption that the average LTV here is 130%, only £5.49bn of the £23.8bn is at risk, with £18.31bn returned to banks.
This takes UK banks’ total property debt at risk, as captured by the £170bn sample, to £6.88bn.
The combined ‘safe debt’ from the two LTV pools – £18.31bn plus £12.51bn, equating to £30.82bn – could conceivably trade in part at a discount and in part at a premium to current carrying value, reflecting further market improvement or deterioration and through asset management.
In a bearish forecast, assuming that the net average discount across the £30.82bn was 30%. This would reflect a further £9.25bn in addition to the assumed £6.88bn, equating to £16.13bn.
Alternatively, the discount could be as little as 10%, which would imply a further £3.08bn of losses, totalling £9.96bn.
It matters less which figure is taken as to ‘where the level of loans at loss currently lies’, and more to appreciate the point this alternative analysis has attempted to establish.
That is, despite the collapse of many property lending banks, and near-collapse of more still, that the system is working through the torrid mess, in an orderly, slow and increasingly predictable manner.
The last five years has required an immense amount of government intervention, taxpayer money, and huge losses through loan impairment charges running into the tens of billions – if not more – but the system has worked through a tremendous legacy debt, leaving property lending as a business model for banks bruised and battered, but still very much intact.