UK - The volume of debt secured against UK commercial real estate fell in 2009, but the value of loans reported to be in breach of financial covenant almost doubled in the first half of the year, according to a new study.

The latest Commercial Property Lending Report from De Montfort University also showed that the value of loan defaults tripled in the first half of 2009 to £11.8bn (€13bn).

The overall value of debt secured against the UK real estate sector actually fell in 2009 for the first time since the twice-yearly study started in 1997, falling by 0.6% from £225.5bn  at the end of 2008 to £224.1bn by the end of June 2009 mid-year.

The British Property Federation (BPF) claimed this showed the commercial real estate lending boom was over and argued the UK commercial property market was "taking its first tentative steps on the long road to recovery".

More than £5bn of debt was reported to De Montfort as being restructured or extended during the first half of 2009, however the university estimated that a further unreported £7bn could be added to this figure.

The practice by banks of not crystallising losses is the reason why large swathes of commercial real estate have not been placed on the market in recent months, even though it is estimated that £106bn of real estate debt is due to be repaid by 2011.

"There is clearly a process underway of banks reducing their exposure to commercial property, but it seems likely to be a slow and long drawn out one," said Liz Peace, chief executive of the BPF.

"While more loans are reported as being in default, it probably remains the case that lenders are willing to leave loans in place if the interest continues to be paid, even if they are in breach of financial covenants."

Figures presented by CB Richard Ellis estimate that £280bn of UK commercial real estate debt was outstanding midway through 2009.

Its new report, entitled UK Commercial Real Estate Debt - a Two-Tier Market, estimated that half of these loans are due to mature before the end of 2012, although it also concluded that not all of it is "bad debt".

CBRE said if lenders were to minimise losses and recoup  as much value as possible they should focus their attention on the quality of the underlying real estate assets.

The report differentiated loan books into categories according to three key lending terms: the level of initial leverage; the point in the cycle when the underlying property was acquired; and the quality of the underlying property collateral.

Loan vintages of 2006 and 2007 were revealed as being the source of the majority of problems now facing borrowers and lenders alike, but CBRE said certain categories were at far greater risk than others.

Lenders should focus on the £79bn of loans, or 27% of outstanding debt, that fell into its ‘poor quality property category' - predominantly properties with weak tenants and potentially difficult to re-let.

"The amount of current outstanding debt is clearly a significant challenge for lenders," said Peter Damesick, executive director at CBRE.

"However, our analysis shows that not all of it is problematic. With the UK market already reporting some recovery in value, especially for prime and good secondary assets, some loans - even those that are currently impaired - should see improving loan to value ratios before too long, subject to the quality of the underlying asset."

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