U.K. Property Loans Facing 92 Billion-Pound Financing Gap

U.K. commercial real estate investors may be unable to refinance about half of their 198 billion pounds ($303 billion) of bank loans as property values fall, a survey by De Montfort University shows.

About 92 billion pounds of remaining bank loans are “likely to be unrefinancable on terms available in today’s lending market,” according to the survey of 78 lenders, which was published today. The amount of the loans is too high compared with the real estate backing them, the report by the Leicester, England-based university said.

Banks and other lenders cut U.K. commercial real-estate lending by 7.7 percent last year as they mended balance sheets damaged by losses and sought to meet capital rules, De Montfort estimates. Almost a quarter of all property loans are in “severe distress” because the outstanding debt is higher than the value of the real estate as low-quality buildings in the U.K. depreciated further last year.

The U.K.’s weakening economy last year “was having a detrimental impact on borrowers’ cash flows and the capital value of commercial property,” Bill Maxted, who wrote the report with Trudi Porter, said in a statement. “The situation with many existing problem loans was deteriorating.”

Impaired Loans

Lenders may have to further write down the value of their loan books to reflect real estate prices, researcher Investment Property Databank Ltd. said in a statement today. About half of unpaid commercial real estate debt was loaned in 2007 and 2008 as prices peaked, suggesting that the value of the loans “is still being overstated,” IPD said, citing De Montfort’s data. “This continues to raise questions over the values at which banks are holding underlying asset values.”

Margins on senior loans for prime properties fell significantly in the last six months of 2012, according to the survey. Competition from German and U.S. lenders such as Wells Fargo & Co. (WFC) and Morgan Stanley (MS) drove down the rates lenders were able to charge, IPD said.

Banks can charge as much as 3.75 percentage points over benchmarks for the safest portions of commercial mortgage debt in the U.K. and Europe, about five times the spread in 2007, Alvarez & Marsal Inc., a consulting firm, said in February.

About 45.5 billion pounds of the loans are due for repayment this year and more than 70 percent of all outstanding commercial real estate debt is due for repayment over the next five years, the survey showed. For the second year in a row, no lender was willing to provide building finance for developments without an occupant agreeing to lease the space in advance, according to Maxted and Porter.

The De Montfort survey is the largest of its kind covering the U.K.

To contact the reporter on this story: Neil Callanan in London at ncallanan@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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