Bad real estate loans hit post-GFC high
The Covid-19 pandemic has pushed bad real estate loans in the UK to their highest level since the global financial crisis more than a decade ago.
The latest UK Commercial Real Estate Report from the Business School found that sub- or non-performing loans reached a new post-GFC peak in 2020, with 8.6% subject to some form of breach or default.
That figure compares to 4.8% a year earlier, with defaulted loans rising to 4.6% of outstanding loans in 2020, up from 3.25% in the previous year. The most cited problem in the report, which surveys lenders active across the UK, were loan-to-value covenant breaches and non-payment or non-prepayment of the loan at maturity.
The Covid-19 pandemic has pushed bad real estate loans in the UK to their highest level since the global financial crisis more than a decade ago.
The latest UK Commercial Real Estate Report from the Business School found that sub- or non-performing loans reached a new post-GFC peak in 2020, with 8.6% subject to some form of breach or default.
That figure compares to 4.8% a year earlier, with defaulted loans rising to 4.6% of outstanding loans in 2020, up from 3.25% in the previous year. The most cited problem in the report, which surveys lenders active across the UK, were loan-to-value covenant breaches and non-payment or non-prepayment of the loan at maturity.
New loan origination of £33.6bn was down by almost a quarter year-on-year, although that was less than the drop of a third that the market had suffered over the first six months of the year.
Extensions and refinancing dominated activity in 2020, accounting for 57% of all new lending.
Margins rose across all property types other than logistics, while new loan-to-value ratios hit a historic low, averaging 50-55%.
Lenders have largely turned their backs on secondary retail, with just 13 lenders considering such deals, compared to 40-50 in other sectors. A fifth of lenders’ loan books are backed by some form of residential asset and 28% by offices.
Nicole Lux, senior research fellow at the Business School and author of the report, said: “Loan book quality differs substantially across different lenders, and it has become particularly apparent that lenders with loan books up to £1bn have generally lent against assets of lower quality.
“Forty-three per cent of lender loan books are above 70% LTV, 48% of loans having an interest cover ratio of below 2x, with 7.5% of their loans reporting default.”
Lux added: “We predict that real estate lending will become more expensive and require further capital for borrowers across the next two to five years, due to increasing maintenance and improvement requirements to meet environmental, social and governance standards, necessary conversions or repurposing and increased capital costs of banks.”
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