The news recently that Lloyds Banking Group is to sell £1 billion of property loans on top of the £1.8 billion it has already sold this year highlights the continuing problem that UK banks still face with commercial property debt. As of May, the FT reported that Banks were fighting to reduce a £224bn exposure to commercial property with about half the loans set to mature by 2013 and a fifth still in breach or default following the crash in values. of these, £45bn of loans were reported in breach of financial covenants or in default.
Although outstanding debt has dropped over the past year by about 10 per cent but only about half of this was through repayment. Lenders took possession of and sold property worth £500m during the year, and wrote off a further £500m. Banks took more than £1.2bn of equity in exchange for debt, and up to £1bn was subsequently sold. Only between £4bn and £5bn of the debt was estimated as repaid, while a significant proportion of debt was also taken in by Nama, the Irish “bad bank”.
According to the FT, between 2011 and 2013, about £105bn of debt held on balance sheets will be due for repayment, with a further £39bn by 2015. In 2011, £45.9bn of debt is due to mature – up from £34.7bn in 2009 owing to extensions of loans previously due for repayment. Much will need to be extended again. This could mean further write-downs as well as more forced sales, thus suggesting a further correction in prices.
But with Banks rapidly moving out of the sector, where are the buyers going to be funded? There's also a continuing credit crisis for potential purchasers, with only about £10bn of genuine new lending made last year, and at some of the most expensive terms on record. The FT reported that during 2010, 43 per cent of active organisations undertook no loan originations.
As most agents know, as a result of difficulties with securing lending for property purchases in the UK, transaction volumes have suffered, and, unless there's a flood of new credit sources coming on-stream, it's going to be a cash buyer's market for some time.
Does that mean that the long-expected correction won't actually happen? You'd have to be a betting man to say that it won't. But with so much risk around internationally at the moment, who could say that property won't regain its old place as the safest asset class?
For further information please contact Mark Copping on 0207 355 6115 or e-mail mcopping@hamlins.co.uk