£45bn of commercial loans lent at 110% LTV

Almost a quarter of outstanding commercial property loans are secured against property worth less than the debt owed, according to De Montfort University’s latest Commercial Property Lending Market report.

The report, compiled at the university by Bill Maxted, Senior Lecturer, and Trudi Porter, Researcher, examined commercial property loans held by 87 lending teams at 78 banks across the country.

They discovered a polarised picture of lending. While investors were active and keen in certain sectors, notably central London investment schemes, a fifth of loans on problem commercial property were in “extreme distress”.

It was also found that 23 per cent of the total debt owed to banks, worth about £45 billion, is currently lent at an equivalent LTV of 110 per cent, meaning that many properties are not worth as much as the total debt secured against them.

Banks reportedly have £217 billion worth of loans secured against commercial property in Britain, though have reduced their exposure to such debts as, year on year, the number of loans forwarded has decreased by 7.7 per cent, continuing a growing trend.

53 per cent of outstanding loans are currently at an LTV of 70 per cent, an improvement on 2011’s total of 50 per cent. On the other hand, £92 billion has been lent at 71 per cent LTV, and would therefore not meet standards for refinancing in the current lending market.

The study also found that £45.5 billion worth of loans have to be repaid in the next 12 months, and more than 70 per cent of commercial loans will be due within the next five years.

2012 also marked the second consecutive year in which no lender was willing to finance developments without borrowing firms being pre-committed to lease space.

Speaking about the outlook in the market over the past year, Bill Maxted said: “During 2012, lending organisations reported generally that the weak UK economy and increasing incidences or tenant failures, particularly in the retail and hospitality sectors, was having a detrimental impact on borrowers’ cash flows and the capital value of commercial property.

“There was a reduction in the year on year number of new impaired loans, but the situation with many existing problem loans was deteriorating. Lending organisations had become more inclined to sell properties securing non-performing loans with these decisions often being driven by regulatory pressure.”

Liz Pearce, Chief Executive of the British Property Federation, said: “The ongoing unwinding of loan books from the 2008 peak has continued, as lenders slowly but surely deal with the legacy debt.

“This is welcome, as is the steady pace at which it’s happening. However, the findings also point towards increasing polarisation in the market and two-tier investment as the proportion of loans with LTVs of less than 70 per cent and greater than 101 per cent increase.”

She added: “The worst property is getting worse, while there are signs of recovery at the other end of the spectrum.”