UK lenders to turn to Grade C assets, DTZ forecasts

Lenders in the UK are increasingly expected to view older or lower grade property more favourably, according to new research by DTZ.

More attention for lower quality assets will, the property adviser said, make it easier to refinance legacy loans and trigger new injections of capital into the market.

DTZ's Debt Funding Gap report - published for the whole of Europe - estimates the refinancing gap of maturing debt on commercial property across the continent, taking into account the impact of banking regulations.

For the first time since DTZ launched the research in 2010, it includes a detailed analysis of the UK's funding gap by property grade using estimates for originations, changes in values and origination loan to value ratios.

The findings are contrary to current market consensus, which has for a long time been negative on the lending prospects for lower quality buildings categorised in the report as Grade C.

DTZ’s research shows that the debt position of this category is no riskier than that of more modern commercial properties - Grade A and B - which could increase lending in the market from banks and other institutional investors such as insurance and pension funds.

Nigel Almond, head of strategy research at DTZ and author of the report, said: 'On the basis of our analysis, the UK's refinancing gap on an absolute basis for Grade C is a modest £1 bn (€1.2 bn) over 2013-14. This compares to £3.6 bn for Grade A. There is a further £9.8 bn gap for grade B. The larger refinancing gap on Grade A and B assets is due to their higher absolute values and related amounts lent against them.

'However, on a relative single-asset basis, Grade C is impacted as much as Grade A. Assuming a notional asset value of £100 mln in 2006, the refinancing gap today for a Grade C asset would be £36 mln, compared to £38 mln on Grade A.'

This lower absolute gap on secondary properties should allow more bank and non-bank lenders to move into lending secured by lower quality properties, as the downside risk for this smaller stock of buildings is not significantly different.

Hans Vrensen, global head of research at DTZ said: 'This UK analysis confirms our earlier held views that lower quality assets are not necessarily in a worse position than higher quality assets, due their legacy debt positions.

'In addition, we suspect that the same fundamentals will hold true across other European markets. We expect that this will further assist market participants to put risk in its proper perspective and become more active in refinancing legacy loans secured by lower quality assets. As long as pricing remains sufficiently attractive, we anticipate that a number of lenders will be moving into the Grade C and B segments.'

The overall net debt funding gap for Europe has shrunk 16% from $50 bn (€37 bn) to $42 bn since May 2013.