A report out this week throws more light on the painful state of the UK commercial property loan book. Bearing in mind that the total loans involved amount to £200 billion, this is where the bank’s balance sheets are being ‘clogged up’.
Commercial property lenders are currently comfortable agreeing loans which are about 65% of the property value (i.e. 65% Loan to Value – or LTV). However an analysis of the UK banks property loans shows that of the total lent, and still outstanding, only 21% is within this threshold. An incredible 24% (£47 billion) is lent at LTV’s of over 100% – basically negative equity as far as the bank is concerned (bearing in mind that these are ‘valuations for security purposes’). This means that, of all of these loans, about 80% of them would not have been lent using today’s criteria. An astonishing £22 billion (11% of all loans) is at LTV’s of over 120%.
How did this happen? It’s a combination of:
- High LTV’s at the outset (and a lot of this will be the ‘racier stuff’ lent by HLoSS)
- Debt levels increasing as interest is not covered
- Declining valuations – especially in secondary property areas. Revaluations undertaken for security purposes will be ultra cautious in the current market
Does it matter? Well yes – because it affects the banks capital positions and constrains them from further lending.
But the biggest scare is that a significant proportion of these loans will be due for refinancing in the next year (figures are not quoted but it is known that many loans were set up with only 5 year commitments, albeit that they were amortized over say 15 or 20 years). What options are going to be open to these borrowers to refinance loans at high LTV’s and if that cannot happen how will the lenders deal with this?
Choppy times ahead for both lenders and commercial property borrowers!