There’s a nasty rumour going around that summer in the UK has already been and gone. For the rest of the year, the country will remain cold and windy – accompanied by frequent downpours of course – until winter returns to offer some relief. With snow. Fortunately for us in the British Isles, the economic climate is looking a lot better. Well it is according to Commerzbank.
According to Jörg Krämer and Peter Dixon, the property market in the UK is finally on the road to recovery, together with its European neighbour Denmark:
| “In Denmark house prices started to rise again slightly at the end of last year (0.8%), whereas this process had already begun in the UK at the start of 2012 (around 2% on average). In addition, there has been a recent rise in UK residential investment, while in Denmark it is still in decline.” |
And this is all good news for the currency:
| “The revival on the UK property market supports our view that sterling could well make some slight gains versus the euro in the medium term.” |
But while Commerzbank points to a recovery in the housing market, others see problems bubbling under the surface: property debt in the UK is becoming polarized. The Commercial Property Lending Market report by De Montfort University, the UK’s largest property lending survey, highlights:
| “While the slow unwinding of commercial property debt continues at a steady pace from the 2008 peak, the data points to a growing polarisation between good quality and bad quality assets. Sub-prime property, particularly outside London and the southeast, remains out of favour with investors in part due to the unwillingness of lenders to provide new loans secured against this property. However, increased competition among lenders for the least risky loans has pushed down borrowing costs for the best quality assets. |
| “The survey of 87 lending teams from 78 banks reports the decline in capital values of secondary and tertiary properties in particular pushed the proportion of outstanding debt considered to be in severe distress – with a loan-to-value ratio of 101% or more – to £45 billion, or 23% of the total outstanding debt. At the same time the proportion of debt with a LTV ratio of 70 per cent or less stood at 53%, an improvement compared with 50% at year-end 2011. In all £92 billion had an LTV of 71% or more, meaning that, from the point of view of LTV, it is likely to be unrefinancable on terms available in today’s lending market.” |
Moreover, the report also highlights that although non-traditional lenders are becoming more active, their appetite is selective, with a preference for investment projects contained in central London. And with debt funds making up only 1% of outstanding property debt and 5% of lending activity in 2012, “they are unlikely to be a silver bullet in solving the credit drought where it is most acute: commercial property development projects and the regions generally”. As Dominic Reilly, director of Jones Lang LaSalle corporate finance and head of UK debt, explains:
| “The 2012 survey reveals many encouraging signs of increased activity and liquidity in the UK debt market from UK banks, insurance companies and new non bank debt funds.” |
But more importantly:
| “There is still more than £45 billion to be refinanced in 2013 and new entrants and a return to some CMBS issuance is needed to plug the funding gap.” |
The recovery that Commerzbank point to appears to be distinctly one sided...