U.K. commercial real-estate investors may be unable to refinance as much as 100 billion pounds ($158 billion) of loans and the euro-region’s debt crisis is making banks less willing to extend credit, according to a study by De Montfort University.
About 72.5 billion pounds to 100 billion pounds “will struggle to be refinanced on current market terms,” according to a December survey of 63 lenders by the university, located near Leicester, England. The borrowers will have insufficient collateral to refinance maturing loans under current lending terms, the study showed.
Banks and other creditors cut U.K. commercial real-estate lending by 6.8 percent to 212.3 billion pounds last year as they bolstered their balance sheets and recapitalized to meet stricter regulations, De Montfort estimates. The situation may be worsened by Europe’s escalating sovereign-debt crisis because banks may have to make larger provisions and writedowns as government bonds sold by countries including Spain and Greece slide.
“The debt crisis is regarded as a real threat to asset values in the U.K. and globally,” Bill Maxted, who wrote the report with Trudi Porter, said in a statement. The problem “has to be solved before national economies and lending markets can start to improve.”
Scale Back Lending
Europe’s banks, which provide as much as 94 percent of credit for the continent’s property industry, may scale back commercial-property lending by 700 billion euros ($886 billion) in the next three to five years, Morgan Stanley estimates. The region’s banks have incurred 538.6 billion euros of losses since the third quarter of 2007, according to data compiled by Bloomberg.
Societe Generale SA (GLE), France’s second-largest bank, and Eurohypo AG, Commerzbank AG’s real estate lending arm, have halted new lending. That’s created opportunities for insurers and funds to enter the market.
Respondents to the De Montfort survey said they increased lending margins, required larger downpayments and increased loan origination fees, the survey showed.
For the first time since De Montfort started its twice- annual survey 11 years ago, no bank said it was prepared to lend against development projects without a tenant committed to lease space or a buyer for the property.
The U.K. has the second-highest level of real estate debt in Europe after Spain, according to the European Banking Authority. Britain’s economy entered a double-dip recession in the first quarter, adding to the commercial real estate market’s woes by curbing rental growth and reducing the likelihood of rising property values.
If social-housing loans, commercial mortgage-backed securities and Irish lending in the U.K. are added, commercial real estate loans in Britain would total 299 billion pounds, De Montfort estimated in the research.
U.K. bank lending may get scarcer if the country’s financial regulator goes ahead with a plan to introduce tougher capital requirements for these loans and increase the amount of capital that banks must set aside against them.
The Financial Services Authority’s proposed rules, known as “slotting,” may force banks to raise an additional 40 billion pounds to cover losses for bad property loans, according to Andrew Petersen, a partner at law firm K&L Gates LLP in London.
“We would hope that the FSA exercises extreme caution in its implementation of slotting,” Liz Peace, chief executive officer of the British Property Federation, said in a statement accompanying De Montfort’s report. The proposals may limit “any signs of a recovery in the property sector and further risk making it a less attractive place in which to invest,” she said.
Respondents to the survey indicated that 20 percent of loans exceeded the value of the real estate backing them. About 153 billion pounds, or 72 percent of bank loans, are scheduled to mature by the end of 2016, according to the study.
Respondents said 48.3 billion pounds of their loans were in default or contained terms that had been violated.
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