British commercial real estate investors may be unable to refinance about half of their £198 billion (HK$2.3 trillion) of bank loans as property values fall, a survey by De Montfort University shows.
About £92 billion of remaining bank loans are "likely to be [not] refinanciable on terms available in today's lending market", according to the survey of 78 lenders, which was published on May 17. The amount of the loans was too high compared with the real estate backing them, the report by the England-based university said.
Banks and other lenders cut British commercial real-estate lending by 7.7 per cent 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 Britain depreciated further last year.
Britain'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. "The situation with many existing problem loans was deteriorating."
Lenders might have to further write down the value of their loan books to reflect real estate prices, researcher Investment Property Databank said.
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 dived in the last six months of last year, according to the survey. Competition from German and American lenders drove down the rates lenders were able to charge, IPD said.
About £45.5 billion of the loans are due for repayment this year and more than 70 per cent of all outstanding commercial real estate debt is due for repayment over the next five years, the survey showed.