Commercial property fog in U.K.

An emerging property problem, with uncertain impact, muddied by poor disclosure. Everyone is in a tizz about the UK commercial property market, where values have been falling far more steeply than have house prices.

Rating agency Fitch has pointed out that as much as a tenth of UK CMBS could default if the slump in values reaches 1990s proportions. AAA-rated bonds would fair much better, Fitch added, with less than 1 per cent at risk in a “severe downturn.” But then we’ve heard that before.

UK capital values have fallen about 15 per cent since last summer, while rental growth has slowed but remained in positive territory. As such the 1990s nuclear scenario is still some way removed. Between 1989 and 1993, rental values in central London offices halved, while capital values were also said to have dropped by 50 per cent. At this point, the economic backdrop looks more promising than in the ’90s era, in terms of corporate defaults, inflation and unemployment levels.

But while speculative building didn’t reach the same heights on the run up, the City still looks to have an excess of new space just as the banks are cutting headcount. And London offices contributed about 45 per cent of all UK CMBS collateral. Worrying then that the Fitch study only looked at the effects of a shift in valuation yields, rather than the prospect of a rental slump.

The boom of CMBS issuance in the UK on the way up helped banks grow their lending strongly. More than 70 per cent of outstanding loans date back no further than three years, which pushes refinancing risk further into the future but also constitutes a hefty chunk of business written at the top of the market.

The effect of all this on the UK’s banks is an area worth monitoring, say CreditSights. Is patchy disclosure itself reason enough to be cautious?
Barclays, they note, appears to have been the most conservative in respect of property lending. But it did in 2007 have CMBS exposure of £12.4bn, of which £11.1bn is awaiting securitisation. More than half of those loans were US originated.

At the other end of the spectrum, RBS’s numbers are complicated, and flattered, by the division of ABN’s lending between its buyers. It has disclosed loans originated for the purpose of securitisation of £8.8bn net of hedges, mainly in Europe.

All the banks, notes CreditSights, lay claim to conservative LTVs (in the 60s), diversified portfolios and limited lending to speculative development. If the commercial property market deteriorates, investors might like a little more detail in the next round of numbers.



...of which £11.1bn is awaiting securitisation...still some "securitization" going on ? I thought "securtization" is NOT IN anymore ?