Property-Loan Defaults Rise as Banks Pull the Plug: U.K. Credit

U.K. commercial property lenders pushed defaults to a record high last year as rising values and an improving economy spurred them to get tougher on long-delinquent borrowers.

Loans in default climbed 13 percent to 24.5 billion pounds ($41 billion) as banks became more willing to “pull the plug” over late repayment, according to data from a De Montfort University survey of 76 lenders seen by Bloomberg News. The value of other loans in breach of their covenants declined 21 percent to 15.8 billion pounds.

“There has been a lot of pretend and extend as lenders worked through their loan books to take into account falling values and the lack of money available for refinancing,” Bill Maxted, a senior lecturer at De Montfort, said by phone. “Now that values are improving and provisions are rising, they’re demanding repayment.”

Write-offs on commercial real estate loans were three times higher than those for residential mortgages since the collapse of Lehman Brothers Holdings Inc. in 2008 as values fell by more than 40 percent, the Bank of England said on May 30. After cutting outstanding debt and increasing provisions against future losses, banks are now cleansing their balance sheets of problem property debts as they undertake new lending.

Market Rebound

U.K. commercial-property values have risen 8 percent over the past year, according to Investment Property Databank. Offices led gains in April with total return of 1.8 percent compared with 1.5 percent for warehouses. Total return combines rental revenue and changes in property values.

The improvement is encouraging lenders to free up money for property firms increasingly hungry for debt as the economy heads for its best year since 2007, the Bank of England found in its first-quarter latest Credit Conditions Survey.

Banks cut outstanding commercial property debt to 179.8 billion pounds in 2013 from 270 billion pounds five years earlier, according to De Montfort, whose semi-annual property lending report is used by financial-stability officials at the BOE. Lenders have 9.3 billion pounds set aside to cover potential losses in the future, up from 6.8 billion pounds in 2012, the survey showed.

“There’s been an incredible transformation in the lending market over the past 24 months,” said Nick Leslau, who led the June 5 London initial public offering of Secure Income REIT Plc. “It’s giving banks the confidence to start tipping things over and making sales because there’s now a market to sell into.”

Leslau is a non-executive director of Secure Income REIT, which climbed 23 percent on the first trading day.

Loan Books

Lenders reduced their commercial real estate books by 38.1 billion pounds in 2013. Write-offs accounted for 16 percent of the reduction, up from 6 percent a year earlier. The loan books declined even as new lending rose 17 percent to 29.9 billion pounds.

“There has been an increase in liquidity and equity coming into the market that has had an impact on values, which of course has helped many distressed situations,” Maxted said. Banks “have also been in a position to take some losses and actually get the loans off the books,” he said.

The turnaround in values attracted an average of one new lender to the U.K. market every week over the past two years as larger banks retreated, broker Savills Plc said on June 3. Of the new lenders, 63 percent aren’t banks. Most are insurers and private-equity firms. Now, 200 institutions with plans to loan 75 billion pounds are competing for about 40 billion pounds of planned borrowing.

‘Excessive Exposure’

“Banks are going to have their participation in the property finance markets diluted or reduced,” William Newsom, a senior director at Savills, said by phone. “The Bank of England has indicated it regards the U.K. banks as having an excessive level of exposure to commercial property lending anyway, so some of that excess is being transferred to non-bank lenders.”

British lenders showed increased willingness to provide commercial property debt for the sixth straight quarter during the three months through March, and that’s expected to continue through the second quarter, according to the BOE. During the next five years, about 71 percent of 127 billion pounds of debt is due for repayment, according to De Montfort University.

Royal Bank of Scotland Group Plc (RBS) and Barclays Plc were among the largest U.K. lenders to commercial real estate projects over the past year, according to Savills. Property companies pay about 4 percent for debt, based on five-year swap rates, the broker estimates. U.K. government bonds maturing in five years yield about 2 percent.

“The big question now is if this upturn in values will continue, because it was sparked by huge pent-up sums of money,” said Maxted. “We’ve still got about 30 billion pounds of loans where the loan-to-value ratio is about 100 percent, so how banks deal with that right across the market is very difficult to say.”

To contact the reporter on this story: Patrick Gower in London at pgower@bloomberg.net

To contact the editors responsible for this story: Andrew Blackman at ablackman@bloomberg.net Ross Larsen, Andrew Atkinson

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