A Trickle of Bad U.K. Property Loans Is About to Become a Flood
(Bloomberg) -- The number of soured U.K. commercial property loans started rising in 2019 for the first time in eight years. Now, it’s set to skyrocket.
The coronavirus outbreak will trigger as much as 10 billion pounds ($12.3 billion) of losses and write-offs on loans tied to U.K. stores and malls, according to a survey of lenders by Cass Business School. That’s after a slump in retail property saw the value of bad loans spike by more than a third last year, though to a still relatively low 2.9 billion pounds.
“The effect of the coronavirus crisis will be most felt by the already struggling retail sector,” said Nicole Lux, senior research fellow at Cass. “But other sectors such as hotels and leisure, student housing and residential investment property will be greatly affected.”
Retail property in the U.K. has plunged in value as brick and mortar retailers sought to slash their rent bills in the face of rising staff costs, high property taxes and increasing competition from online rivals. That’s forced up the relative indebtedness of many malls and stores, prompting foreclosures and fire sales that have further weighed on prices. Now, with all but vital stores forced to close, the stakes have risen substantially.
While the absolute volume of defaulted credit remains low compared with the aftermath of the financial crisis, there are 43 billion pounds of commercial property loans due to be refinanced this year and next.
That “sounds more challenging in today’s conditions of economic lockdown and material valuation uncertainty,” Peter Cosmetatos, chief executive officer of the Commercial Real Estate Finance Council Europe, said in a statement accompanying the report.
Loans tied to development projects are also at risk, with restrictions on movement impacting construction sites where social distancing is impossible to maintain. About 22 billion pounds of such loans are affected by delays and defaults on construction contracts, with 14 billion pounds of residential development loans also at risk of being partially written off, the report warned.
Overall U.K. property lending fell 12% to 43.8 billion pounds last year, mirroring a decline in transaction levels during a period marked by heightened Brexit uncertainty, the survey found.
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