UK commercial real estate has a “long way to go” before its legacy loans are worked through, according to a new Investment Property Forum report.

The IPF said the “race is on” for both lenders and borrowers to resolve the legacy of the last cycle’s excesses. Around £60bn of higher risk loans – above loan-to-value ratios of 70% – are holding back the market.

The UK is still faced with so-called ‘zombie’ loans, where loans get repaid through rent rolls but remain highly-leveraged. A rise in interest rates could, the report said, push such loans into outright default.

Despite a £36bn reduction of debt in higher risk loans over the last 24 months, almost 20% (or £31bn) of all current commercial borrowers are still in negative equity. 

“Whilst considerable progress has been made to clean up legacy commercial real estate lending, there is still a long way to go before the UK returns to a ‘normal’ funding environment,” said the report, acknowledging the positive effect of increased investor appetite for UK property.

Loan sales – although having helped clean up balance sheets – are not the only solution, IPF said. A significant amount of loans that cannot be refinanced on current market terms remain, leaving many borrowers facing uncertainty.

The IPF said UK lending could be four to five years away from a full recovery. By then, both the quality and location of underlying assets securing legacy debt will be inferior when compared with assets which have already been worked out. 

Malcolm Frodsham, director of real estate strategies and chair of the IPF’s steering group that produced the research, said: “Hope for some borrowers may come from rising asset values and an improved letting market.”

The reality, Frodsham said, is that “increasingly poor quality assets will lose further value”, as remaining tenants look to upgrade at lease expiry.