The latest edition of the annual Commercial Property Lending Survey conducted by De Montfort University (Leicester, UK) is now available and confirms the impact of the credit crunch on the property lending market.
A headline increase of 10% in the total amount of outstanding loans to commercial property (from £220.4 billion at the end of 2007 to £243.3 billion at the end of 2008) which was caused largely by the calling down of previously committed facilities and the restructuring (extension) of existing loans belies a substantial fall in new lending, down 41% in 2008 compared with a rise of 3% in 2007.
This sharp decline, which is expected to continue through 2009, has meant that little new debt is available even for high-quality investment and development projects. Loans that are available are expensive, adding to the difficulties of the industry.
Bill Maxted, Senior Lecturer and Consultant at De Montfort University, and author of the report, said: "This report, which is based on contributions from 60 lending organisations, illustrates with hard data what the commercial property industry has been experiencing in 2008. On the one hand, the size of the overall debt burden by the commercial property industry is not decreasing in fact it actually increased by 10% - but on the other hand the amount of debt available for new projects is on a sharp downwards line towards zero. The quantity of data collected in this survey, together with that of the previous 9 years, will provide an invaluable source of material for the industry, for the banks and for the Government to analyse just what is happening in the market and what needs to be done to ensure that commercial real estate continues to fulfil its important role as both a factor of production and an asset class within the economy, recognising its position as a key source of collateral for loan finance."
Maturing loans that require refinancing are also shown in the report to pose a major challenge. During the next 5 years, between 2009 and 2013 inclusive, 69% of all outstanding debt is due for repayment.
Dominic Reilly, a Partner and Head of Property Finance at King Sturge, one of the Survey's principal sponsors said: "The commercial property industry is acutely aware of the issues caused by the high outstanding debt burden which is why we have seen a range of measures, principally rights issues, aimed at refinancing the balance sheets of the major companies. We would expect to see the impact of these measures, most of which have happened in 2009, to come through in next year's survey. In the meantime, the problems of loan to value covenant breaches, caused by the dramatic fall in commercial property values, have not had the serious impact that might have been expected since the lenders and borrowers have in most cases been able to come to a sensible arrangement. This has been helped by many of the borrowers being able to continue to provide the requisite level of interest cover. With the deepening gloom in the wider economy in 2009, we are now seeing interest cover come under growing pressure, posing a new challenge to the delicate balance between occupiers, landlords and lenders."
Not surprisingly the level of defaulting loans has also risen substantially from £798 million in 2007 to £3,134 million in 2008. This represents almost a fourfold increase by value. The principal reason for defaulting loans is a breach of Loan to Value (LTV) covenants. Similarly the value of loans in breach of financial covenant but not yet declared in default, has risen from £1,597 million in 2007 to £10,695 million in 2008. Primarily in 2008, these have been caused by breaches in the LTV covenant which accounted for 40% of the total (having risen from 23% in 2007). These breaches of LTV covenant have, of course, arisen largely as a result of a sharp decline in property values, down 44% from their highest point according to Investment Property Databank (IPD) figures.
Liz Peace, speaking on behalf of the Property Industry Alliance said: "The data from the De