£23 billion of outstanding commercially-secured loans are in breach of financial covenant, existing outside of previously-agreed restrictions, according to the latest De Montfort University Commercial Property Lending Report.
The study – which surveyed 74 lending teams operating out of 65 lending institutions, including Aldermore, Pluto Finance and ING Real Estate – also found that the aggregated value of outstanding debt secured against UK commercial property has fallen by 4.3 per cent since the beginning of the year, dropping from £213.3 billion to £204.1 billion.
It was also reported that approximately £22.8 billion of commercially-secured loans could be described as ‘in breach of financial covenant’, representing 12.3 per cent of the aggregated loan book of those organisations surveyed.
Furthermore, a further £19.8 billion of loans were described as being in default yet still held as part of loan books at mid-year 2012, equal to 11 per cent of the value of the loan books surveyed.
The Leicester university also received data from eight non-traditional lenders, who provided specialist mezzanine finance and junior debts secured on commercial property.
The majority of institutions saw a small decrease in the size of their books, with 50 per cent of all UK-based lenders and building societies noting a decrease of 10 per cent or less.
Many recorded an increase in the debt they had taken on, however, with 46 per cent of institutions noting a growth in value and 15 per cent tabling an increase of 26 per cent or above.
Lenders also appeared to balance the number of risky loans on their books, with the value of outstanding debt with an LTV of over 70 per cent falling by £12 billion to £94 billion.
De Montfort heard that four ‘traditional’ lending teams - 9 per cent of those surveyed - indicated that they were prepared to consider offering mezzanine finance on investment property.
Mezzanine products were typically offered by these institutions with a 78 per cent LTV, a 3 per cent increase from year-end 2011.
50 per cent of such institutions also said that they might consider offering first charge finance for a fully pre-let development, compared with only 31 per cent of respondents who were prepared at mid-year 2011.
The average LTV offered by all lenders on fully-let commercial developments decreased from 50 to 49 per cent, though the average loan-to-cost ratio offered increased from 57 to 58 per cent.
Lenders widely reported that the emerging regulatory climate ‘has and will make lending secured by commercial property more difficult’, with banks’ increased capital requirements cited as a fundamental cause of difficulty.
Bill Maxted, one of the authors of the report, said: “The loan books are slowly rebalancing as lenders reduce the value of outstanding high loan-to-value legacy debt and increase the volume of loans with lower loan-to-value ratios more akin to those available in the market at mid-year 2012.”
Dominic Reilly, Managing Director at commercial lender Jones Lang LaSalle Corporate Finance, said: “The survey reveals for the first time that of loans outstanding only 11 per cent have an income to interest cover of less than one to one, while 49 per cent have an income to interest cover of more than 1.6 to one, indicating that in the most part borrowers are able to maintain their debt service obligations and that surplus rent after interest is available for repayment."
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