While the fast-growing economies in Asia and Latin America are underpinning a sense of optimism in global property markets, the story is very different elsewhere.
Along with the US, the heavily indebted UK property sector has been among the worst hit by the credit crisis.
The good news is that the sector has recovered from the crash in values during the recession but many fear that addressing the worst of the problems has merely been delayed.
The recovery has seen the number of business failures in the property sector drop over the past year by 1.5 per cent in January, according to Experian, the UK-based information services company.
Mark Batten, real estate partner at PwC, says companies are making progress in dealing with debts. “Lenders are managing businesses carefully to find solutions to help them stay afloat,” he says.
“By and large, they have a good handle on portfolios and are looking to work through problems with their borrowers. They are only resorting to insolvency as a last resort.”
But, he adds, the real estate sector was certainly not out of the woods, and distressed property companies are still struggling to survive at a time when there is no sign of widespread value growth.
The biggest problem is that the value of property is still below the level of debt in many investments made during the boom across the UK, particularly in regional markets that have regained little ground since the bottom of the downturn.
So far, banks have been loath to take on too many of the problems, often preferring to extend loans or agree consensual deals to buy extra time, in part because the scale of the losses would have been too much to deal with during the recession.
Some insolvencies have been prevented by swapping debt for equity in businesses, which has meant that banks avoided a loss through a forced sale.
However, with the UK’s banking sector returning to strength, there is the prospect of further action on problem loans, in the face of adverse economic factors that will impact rental income. This has so far helped cover interest payments.
Lloyds alone, which has about £60m ($96m) of outstanding property loans and some £20bn in its business support unit, now has more than 400 people working on its real estate book.
According to De Montfort University in the Midlands, about two-thirds of the £220bn outstanding to property borrowers due for maturity in the next few years, with some £50bn of the total either in default or breach of its covenants.
Chris de Pury, real estate partner at Berwin Leighton Paisner, predicts problems in future, as banks work through loan books and look to partner with new equity investors at the cost of the old borrowers.
“The market has never really recovered outside London, but people have been able to carry on because income was holding up and servicing interest. Many loans had the protection of swap liabilities, which prevented action.
“But banks are now stronger, while swap losses have lessened and refinancings are coming due. Banks are pretty sensible in how they work out their problems, however. That should prevent a flood of sales and the government will be reluctant to see too much pain.”
He says investors are still sitting on significant cash resources to help distressed situations.
Neville Kahn at Deloitte says banks have dealt with the small number of large borrowers in trouble, and are now moving to the larger number of smaller problem loans. Even so, he does not see a widespread problem. The problems are now mostly outside London, he says.
Fraser Greenshields, partner at Ernst & Young, says the “liquidity squeeze” for secondary, highly leveraged property assets is likely to be prolonged.
“Refinance risk is becoming a primary concern for real estate borrowers. The general lack of available credit has been compounded by the two largest lenders, Lloyds and RBS, deleveraging through the sale of non-core assets. [They] account for almost half the £226bn commercial property lending market.”
Richard Fleming, UK head of restructuring at KPMG, says there has also been an increase in more innovative insolvency practices, such as company voluntary arrangements (CVAs), which would continue to be case in worsening conditions.
“There was nearly double the number of CVAs agreed by property companies with their creditors than retail companies in the last quarter.
There is no doubting that the property industry faces some tough negative economic factors; whether it’s the ever-increasing issue of empty stores on the high street or the continued polarisation of the property market.”
Many property companies remain worried that such a further economic dip could lead tenants to cut back space and demand lower rents. This would hit their own income and cause a rise in insolvencies, as companies struggled to pay their debt obligations.
However, the immediate concern is the refinancing risk in the sector, given expectations that debt will remain scarce in the near future. While the worst of the fall-out from the recession may have been avoided, there are still some testing times ahead.