U.K. Refinancing Gap Could Trigger Real Estate Slump
(Corrects to say in first paragraph that gap is for properties outside of prime locations.)
Commercial properties outside of the U.K.’s most attractive markets may face a renewed slump caused by a 34.4 billion pound ($55 billion) shortfall in financing for debt due in the next four years, an industry group said.
More borrowers will face foreclosure as regulators force banks to reduce real estate loans unless new lenders step in to fill the gap, according to a report presented to the Bank of England on Jan. 28 by the Property Industry Alliance. Forced sales in secondary and tertiary markets could depress prices and increase bank writedowns, the group said.
“The big risk is this negative feedback loop of a lack of debt forcing banks to write down real estate loans and assets,” Phil Clark, head of property at Edinburgh-based Aegon Asset Management and co-author of the paper, said in a telephone interview. “What the industry needs is new real estate lenders, whether that is new banks, funds or insurance companies.”
Lenders including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc haven’t disclosed the size of their property loan writedowns, according to Clark. Bank debt secured by U.K. real estate totaled 243 billion pounds in mid-2010, the report showed.
The Property Industry Alliance’s members include the British Council for Offices, the British Property Federation, the Investment Property Forum and the Royal Institution of Chartered Surveyors.
Representatives from Royal Bank of Scotland and Lloyds weren’t immediately available for comment.
More Insurers
New regulations for European insurers known as Solvency II may help address the debt-financing shortfall, according to Peter Cosmetatos, finance director of the British Property Federation. The rules, scheduled for introduction in 2013, are designed to encourage insurers to take on less risky investments and may spur more of them to become real estate lenders.
“It’s one of the most important pieces of legislation for U.K. real estate,” Cosmetatos said in an interview. “It could make material inroads into the debt-funding gap.”
Banks lent 1.2 billion pounds less than what was repaid to them in December, which was the ninth negative monthly figure in a row, according to a report today from London-based Capital Economics, which cited Bank of England data.
“Anecdotal evidence suggests that banks are starting to get tougher on borrowers with non-performing loans, so there would seem to be no end in sight to the tight availability of credit,” Capital Economics said in the report.
To contact the reporter on this story: Tom Bill in London at tbill2@bloomberg.net
To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net
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