UK property owners in breach on EUR 230b of loans - report

Commercial property owners and developers in Britain are in breach of covenants on four out of every five loans, with £194 bn (EUR 230 bn) at risk, the Australian reported, quoting an unpublished report from the Bank of England. Lenders with £243 bn outstanding to commercial property companies are still heavily exposed to bad loans and could take heavy losses in the coming years.

The Bank of England Commercial Property Forum said that three years on from the start of the credit crunch many of the key property loan risks identified in 2009 were still relevant.

The latest report submitted to the Bank showed that the property industry's total debt of £243 bn was only 3% less than at the peak of property lending in 2008. Only six banks account for 57% of all outstanding real estate debt, with a further six responsible for the next 22%. British banks and building societies account for £150 bn of the debt, with the rest spread across overseas banks and the commercial mortgage-backed securities market.

The forum said that most outstanding property loans - about 80% - had breached their loan-to-value covenants and that loan risk was increasing, with borrowers struggling to pay interest as rents declined for secondary and tertiary properties. 54% of the loans - £163 bn - will mature by the end of 2014 and 'there remains a severe lack of debt to refinance them'. The forum, chaired by the former Liberty chairman Sir Robert Finch, said that the lack of refinancing capability was because the number of active property banks in the market had fallen and new sources of debt were scarce.

It added that at loan maturity there was also a 'mismatch between investor requirements and the banks' ability and willingness to accept losses'. It said that many loans were being extended as a result of this inability to refinance debt, with borrowing costs rising, which could aggravate the problem for owners of less-than-prime properties with declining income.