The UK real estate market faces the prospect of another credit crunch as lenders come to terms with an impending Brexit.
Some major property financiers expect to be curtailed by having to hold more capital in reserve against their loans to safeguard against the heightened risk of losses caused by a dip in asset values.
A drying-up of credit would be an eerie echo of 2007 before the 2008 global financial crisis, although overall levels of debt are much more comfortable than a decade ago.
A head of real estate at one of the UK’s largest domestic lenders told Estates Gazette that the firm expected a “starving of the front line of capital”, that its loan book would be downsized, and that it would become “much more selective” about against what and to whom it lends.
‘Slotting’ regulations introduced in 2013 require UK banks to hold capital reserves against their loans, dependent on how risky they are perceived to be.
Peter Cosmetatos, chief executive of CREFC Europe, the trade association for the commercial real estate finance industry, said: “It is absolutely inevitable that in the short term there will be less credit available and it will get more expensive.
“UK clearers will have a cautious approach. Whether that is due to an adjustment caused by re-slotting loans, moving along the [risk] scale, and as a result there are higher capital requirements, or whether they are just cautious of the market is unclear – it will probably be both.”
The chief executives of HSBC, Barclays, Lloyds, RBS and Standard Chartered, among others, attended a Bank of England “fireside chat” on Wednesday and were urged to keep lending in the face of extreme uncertainty over asset prices.
The next day, Singaporean lender United Overseas Bank announced it was suspending UK lending to “ensure customers are cautious with their London property investments”.
One German lender abandoned a deal to finance the purchase of a regional office and increased its margin on a London office deal by 30bps, expecting that a fall in value would see the loan rise from 50% to 55% loan-to-value.
Despite concerns that credit will dry up, the prospect for high levels of distress due to a fall in values is much less than in the previous cycle. Research by De Montfort University and Savills shows loan-to-values for prime UK offices stand at 65%, compared with 82% in 2005.
All the banks contacted by Estates Gazette said they had not shut for business.
Comment – David Hatcher, EG‘s head of news and finance
A phrase from the last crash – “relationship banking” – came up at a meeting in the City this week.
A banker in charge of one of the world’s largest real estate books told me – with a somewhat sadistic smile – that it was payback time for borrowers that had “screwed us for every basis point” in negotiating terms during the boom times.
Borrowers that helped banks by using their “ancillary services”, such as their equity and debt capital markets divisions, and hired them to advise on mergers and acquisitions, that did not get “too big for their boots” when negotiating new facilities, would be at the front of the queue when refinancing or needing a favour.
Those that had “behaved atrociously” in previous years, blue-chip companies included, are unlikely to be treated as kindly. For them, finding debt will be more difficult and most likely more expensive.
How a new credit crunch may unfold
Asset values fall by 10-20%
Loan-to-values increase by 5-15%
Real estate loans deemed riskier by banks’ internal committees and regulator
Capital that banks are required to reserve against loans increase
Banks have less capital to lend and are less willing to lend against an asset class deemed as higher risk