Manchester’s problem property loans valued at £1.4bn
MANCHESTER’S commercial property market is likely to witness a further deterioration in value as a wave of existing debt falls due for refinancing, according to a new report published by pro.Manchester chief executive John Ashcroft.
Mr Ashcroft’s report, which has been published independently of pro.Manchester, estimates that the major lenders have around £6.4bn worth of commercial real estate loans outstanding in the Greater Manchester area, and that around £700m of these could currently be in default. A further £700m of loans area also likely to have breached banking covenants.
Moreover, around £2bn of the outstanding loans to the Greater Manchester market are due for refinancing within the next three years. This is likely to “crystallise forbearance for a significant proportion of the loan portfolio,” he argues.
Mr Ashcroft’s report was prepared by analysing data from a De Montfort University report on the UK’s commercial property market and from contributions from local lenders, including Barclays and the Co-operative Bank.
It argues that market conditions for commercial property sector are “deteriorating”.
“An economy with low growth at best, a rising risk of a deteriorating double dip recession, problems in Europe, the slowdown in world trade and the possible implosion of the European banking system create challenges to investment and return,” he said.
“In the UK, during 2011, lenders reported weakening cashflows due to tenant defaults, tenant non-renewals and renewals at lower rents. This in turn was impacting on capital values, loan-to-value ratios, generating a real risk of breach of covenant leading to default.”
He said that capital values have fallen by an estimated 35-40% since the market’s peak in 2008, and that structural changes to the retail sector – with retailers focusing a more select list of prime locations – puts further risk on lease covenants.
He points out that around 20% of the UK’s commercial property loans are currently under water, and that a further 30% are above the 65-70% loan-to-value rates which banks are using as the basis for current lending practice.
Given that half of the UK’s £212.5bn worth of commercial property loans are due either for repayment or to be rolled over within the next five years, lending margins are edging upwards and the FSA is looking to standardise lending risk models in the sector, it is likely that more loans will fall into distress.
The FSA is likely to order banks to make larger capital provisions to shore up some of the riskier loans, which could lead lenders to take a tougher line on riskier loans.
Despite this, he argues that there are opportunities for new players coming into the market, as asset values are likely to remain subdued, meaning that the yields lenders will be able to achieve will become more attractive.
