Banks? UK commercial property loans at risk of loss were less than ?5bn at the end of June, reflecting just 2.4% of the outstanding ?204.1bn of debt captured by the mid-year De Montfort property lending survey published today.
This ?4.93bn figure at the end of June?contrasts with the ?9.55bn equivalent identified by?CoStar News?in May, based on?De Montfort?s end of year 2011 survey?which captured ?212.3bn in outstanding UK property debt.
On which basis, the fall in UK commercial property loans held by banks which is at risk has fallen by 48.4%, or by ?4.62bn, in the six months to the end of June.
This analysis ? based on the?Mid-year 2012 De Montfort University?UK?property?lending survey? is derived from the loan-to-value (LTV) structural breakdown of the ?204.1bn outstanding balance secured against UK property.
Responses to the mid-year De Montfort survey?s LTV structural breakdown question reflected ?182bn out of a total outstanding ?204.1bn in UK property-secured debt captured by the survey.
According to the De Montfort survey, 17% of this ?182bn is comprised of UK property loans above 100% LTV, which equals ?30.94bn.
Aggregating this up ? to reflect the full ?204.1bn sample captured by the mid-year De Montfort survey ? would imply that the total proportion of UK commercial property loans above 100% LTV is ?34.7bn.
The LTV composition of outstanding UK property loans with LTVs above 100% is as follows:
- 9% of loans, or ?16.38bn, are at LTVs between 101% and 120%, which aggregated to full sample would imply ?18.37bn
- and 8% of loans, or ?14.56bn, are at LTVs of 121% and above, which aggregated to full sample would imply ?16.33bn
Within these two components of the overall UK property market?s LTV, it is the balance of outstanding debt above 100% where the bank risk of loss applies. That is, if a bank enforces against a 110% LTV property loan, the lender would receive back the first 100% and crystallise a loss thereafter (less enforcement, sales and legal costs which are omitted here).
Assuming, then, that the average LTV across the 101% to 120% category was an even 110%, based on the original ?182bn gross lending figure captured by De Montfort, only ?1.49bn of the outstanding ?16.38bn is at risk.
For the second component ? the 8% of loans above 121% LTV ? based on a conservative assumption that the average LTV here is 125%, only ?2.91bn of the ?14.56bn is at risk.
This takes the total at risk, as captured by the ?182bn sample, to ?4.4bn.
When this is aggregated up to reflect the full ?204.1bn De Montfort sample, this implies that the total property loan exposure at risk of loss above 100% LTV ? virtually if not entirely held by banks ? is just ?4.93bn.
This reflects a considerably healthier picture for the state of the UK commercial property lending market than is often represented, although there are a number of implicit caveats, as with all research.
?The new De Montfort figures show further material progress by bank funders,? said Paul Rivlin, co-founder of Palatium Investment Management.
?This evidence will be a surprise only to those who were previously forecasting chaos. The figures, however, also show the very substantial challenge to existing owners with high LTV loans who are faced with stark choices between getting in new equity (or mezzanine) and making sales.?
Equity owners? dilemma
An equivalent piece of analysis can be applied to the two tranches of the LTV structural breakdown for UK property loans above 70%, which have the challenge of refinancing still to face.
- 16% of loans, or ?29.12bn, are at LTVs between 71% and 85%; which aggregated to full ?204.1bn sample would imply ?32.65bn
- 13% of loans, or ?23.66bn, are at LTVs between 86% and 100%; which aggregated to full sample would imply ?26.53bn
This aggregate 29% equals ?52.78bn in the value of UK property loans between 71% and 100%.
Many owners in this pool will likely see enduring value in their properties which still have equity remaining and many will be keen to refinance.
Assuming that borrowers sought to refinance back to 70% LTV, this would reflect an average (from an average 85% LTV), this would require an equity injection of 15% across the ?52.78bn pool, which equates to ?7.92bn.
Aggregating this up to the De Montfort?s full ?204.1bn sample would imply a required equity injection of ?8.88bn. If the new normal for refinancing is down to 60% LTV, the required equity injection would be ?15.52bn.
This ?6.64bn difference ? which excludes existing borrowers with loans in the 60% to 70% LTV range ? is where the many mezzanine lenders eye their enduring opportunity to lend against UK property.
jwallace@costar.co.uk
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