UK - The prohibitive cost of unwinding interest rate swaps on real estate debt is preventing financial institutions from offloading a growing volume of distressed UK assets, according to Savills.
Delegates at the company's annual Financing Property presentation in London were told £120bn (€146bn) of UK commercial property needed to be refinanced between now and 2012, but that the aggregated cost of unwinding the swaps could be more than £10bn.
Borrowers use the swaps to hedge against the risk of rising interest rates.
William Newsom, UK head of valuation at Savills, estimated the cost of unwinding a five-year swap put in place in June 2007 as now being 11.7% of the size of the original loan.
This cost would rise to 20.4% for a 30-year swap.
Furthermore, swaps take priority over senior debt if banks were to sell assets free of debt.
Newsom said this would be a drag on the UK real estate market, as cash-rich investors remained frustrated by the lack of assets coming onto the market.
However, he added that lenders would be unable to extend loans indefinitely, as they have been doing in recent months.
More than half of the outstanding senior debt in the UK real estate sector is due to mature between now and 2012, leading to a serious funding gap.
Royal Bank of Scotland, Lloyds Banking Group and the Irish government's National Asset Management Agency (NAMA) - which between them have more than half of the existing UK real estate debt on their books - are all looking to deleverage their balance sheets, according to Newsom.
NAMA, which is expected to underwrite €81bn of troubled real estate loans before the end of 2010 (see earlier IPE Real Estate article: Ireland's NAMA takes on property-backed 'bad bank' loans), is being monitored by many investors as potential vendor.
Newsom said it was a long-term "workout vehicle" with a 10-year life span from 2009, but regarded "a certain level of disposals as inevitable".
He added that NAMA's problems "were so big" that it may decide to focus on managing assets within its domestic market and seek to offload UK properties first.
Newsom also said the funding gap in the UK real estate market would not be helped by historically low loan-to-value ratios, low lending ambitions from banks and incoming Basel II regulations, which would increase capital requirements.
In terms of new lending, the most active players, according to Savills, included nine German banks, four UK institutions and two international lenders.