2 July 2016 – by David Hatcher
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.
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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.