Real estate lenders are readying for market distress in the aftermath of the coronavirus pandemic, with Lloyds Banking Group set to rekindle a financial crisis-era relationship with CBRE over problematic loans.
Lloyds has engaged CBRE to offer its commercial real estate business support unit valuation advice on loan collateral. The two parties worked together in a similar fashion in the global financial crisis, during which time the Lloyds unit was overseen by Richard Dakin, now global head of CBRE’s Capital Advisors business.
A mandate is understood to be close to being finalised. The companies declined to comment.
Banks are likely to start “quietly reconstituting” divisions to work out troubled property loans, according to Fiera Real Estate’s UK head Alex Price. “Nothing has happened yet” in terms of a notable rise in defaults or covenant breaches in the market, he added, “but you can see all the parts being moved around” at lenders.
Commercial real estate lending in the UK plummeted during the first half of this year as the coronavirus pandemic spread. The latest UK commercial real estate report from The Business School, which covered the first half of 2020, found that new loan origination dropped by a third year-on-year, to £15.5bn. Only 14 lenders surveyed had made a loan larger than £100m during the period, and roughly a fifth made no loans.
The report’s author, Nicole Lux, expects greater signs of distress to emerge, noting that in the aftermath of the GFC, a significant rise in defaults did not materialise until 2011.
“During 2020 lenders have been providing LTV covenant waivers and loan extensions where investors are supporting their properties and making interest payment or provide reserve accounts,” Lux said.
“However, we expect that some investors will be running out of cash in 2021 and lenders will be less willing to give interest payment holidays where they see no solution in the medium term. Hence, we expect to see more defaults and distressed assets in the market from mid-2021 onwards.”
Loans against retail, leisure and hospitality assets are all expected to be areas of stress.
At hotel management and advisory firm Michels & Taylor, which has launched a mezzanine fund to support hotels facing liquidity troubles, chief executive Hugh Taylor told EG last week that although banks have yet to initiate large-scale enforcement over loans, he expects a rise in such moves from next year.
For now, Fiera’s Price said the government’s moratorium on landlords taking action against tenants for failure to pay rent is likely to mean banks will shy from taking over assets.
“I think when that ends, unless there’s a complete reversal in the decline of physical retail, we’ll see a lot more shopping centres default.”
Peter Cosmetatos, chief executive of lenders trade organisation CREFC Europe, said: “For CRE lenders, 2020 was mainly about modest emergency measures – waiving covenant testing and scheduled amortisation, and giving short extensions to maturing loans that would have been difficult to refinance in pandemic conditions.
“Even if things go well, 2021 will be different: lenders will continue to support their stronger relationship borrowers and assets, but action will be needed to deal with those that cannot recover from the stress of the pandemic.”
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