Foreign banks may add to commercial sector woes

News

Mike Phillips

25 July 2009

Troubled banks could cause further pain for the commercial property sector, analysts and industry bodies said this week.

Debt analysts at Barclays Capital said in a note that the actions of foreign lenders could force values down further in the UK market.

“Troubled non-UK banks will be more aggressive with enforcements of their UK commercial mortgage loans,” BarCap analyst Hans Vrensen said in a note on property lending. “This is because they are unlikely to have a long-term commitment to their UK customers, especially if they are state supported in their home country.”

Foreign lenders account for 28% of lending to UK property, or £63bn of the £225bn of loans outstanding (see chart).

“We expect UK banks to be relatively less aggressive, looking to maintain their key borrower relationships by loan modifications and extensions. Albeit, some of this might change once accountants start to take a closer look at the commercial mortgage loan exposure of banks,” said Vrensen.

US Federal Reserve chairman Ben Bernanke warned that the commercial real estate sector could cause significant future problems for US banks and the wider US economy.

He said that the Fed might have to step in and take measures to stabilise the sector, before the problems threatened the wider banking sector.

An Investment Property Forum research paper in the UK warned that, while in the main banks were willing to work with borrowers to extend and restructure existing loans, unavoidable pressures would force them to pull the plug on more borrowers than the market was anticipating.

“While it is true that banks are not about to flood the market with forced sales, wider economic and regulatory pressures on banks will force lenders to take action with their property loan books, either through calling default on loans, bringing in receivers or administrators and selling assets, or restructuring debt and bringing in new management teams where previous borrowers are seen to have failed,” the paper said.

It added: “The perception held by some in the property industry that banks can choose no to undertake loan to value tests and so not trigger a problem is incorrect.”

Details of the government’s Asset Protection Scheme are expected to become clearer when Lloyds Banking Group and Royal Bank Scotland, which have a combined UK property exposure of £97bn, update the market on first-half loan performance in the next fortnight.

Troubled banks could cause further pain for the commercial property sector, analysts and industry bodies said this week. Debt analysts at Barclays Capital said in a note that the actions of foreign lenders could force values down further in the UK market. “Troubled non-UK banks will be more aggressive with enforcements of their UK commercial mortgage loans,” BarCap analyst Hans Vrensen said in a note on property lending. “This is because they are unlikely to have a long-term commitment to their UK customers, especially if they are state supported in their home country.” Foreign lenders account for 28% of lending to UK property, or £63bn of the £225bn of loans outstanding (see chart). “We expect UK banks to be relatively less aggressive, looking to maintain their key borrower relationships by loan modifications and extensions. Albeit, some of this might change once accountants start to take a closer look at the commercial mortgage loan exposure of banks,” said Vrensen. US Federal Reserve chairman Ben Bernanke warned that the commercial real estate sector could cause significant future problems for US banks and the wider US economy. He said that the Fed might have to step in and take measures to stabilise the sector, before the problems threatened the wider banking sector. An Investment Property Forum research paper in the UK warned that, while in the main banks were willing to work with borrowers to extend and restructure existing loans, unavoidable pressures would force them to pull the plug on more borrowers than the market was anticipating. “While it is true that banks are not about to flood the market with forced sales, wider economic and regulatory pressures on banks will force lenders to take action with their property loan books, either through calling default on loans, bringing in receivers or administrators and selling assets, or restructuring debt and bringing in new management teams where previous borrowers are seen to have failed,” the paper said. It added: “The perception held by some in the property industry that banks can choose no to undertake loan to value tests and so not trigger a problem is incorrect.” Details of the government’s Asset Protection Scheme are expected to become clearer when Lloyds Banking Group and Royal Bank Scotland, which have a combined UK property exposure of £97bn, update the market on first-half loan performance in the next fortnight.