More than £250bn of real estate debt held by banks in the UK is secured against non-prime property, according to data compiled by Savills, the international real estate adviser.
The company measured about £350bn of outstanding debt in the UK commercial property market, much higher than suggested in previous estimates when securitised debt, the debt held by the Irish National Asset Management Agency and committed-but-undrawn facilities are included.
Of this, Savills said that one-quarter, at most, had been allocated to so-called prime property, which implies that more than £250bn was used to finance investment in “secondary” or “tertiary” properties where values have stagnated since the end of the crash in 2009.
More than £100m of commercial mortgage debt backed poor quality property, according to Savills, with the remainder in better-located areas and in assets that have a chance to be refinanced.
William Newsom, Savills UK head of valuation, said this debt was both a challenge and an opportunity for investors and new banks willing to lend to the sector. The rebound in prime property has meant that investors looking for cheaper prices have had to look outside core markets such as London.
He said there would be “some hidden gems” in the secondary market.
A total of £115.2bn in loans will mature in the next three years, according to Savills, but it said banks were still extending loans rather than demanding repayment, or working with their customers rather than forcing defaults.
It said that banks were extending current loans by an average of 2.2 years.
Savills also listed the top 16 most active lenders in the UK market, which was dominated by German banks. The list does not include Lloyds, which has the largest outstanding real estate loan book. It suggested that loan-to-value ratios would continue to stay at about 60-65 per cent as lenders remained cautious and the impact of Basel III requiring higher regulatory capital reserves kicked in.
Mr Newsom said: “Debt availability continues to be an issue for this market and we have witnessed a reversion to the historical model of the 1950s, 60s and 70s where higher levels of equity are required.
“However, the market is awash with equity including a new wave of mezzanine providers that can take advantage of low loan to value ratios in order to bridge the gap between senior debt and equity.”