Commercial-Property Loan Defaults Surge 44% on U.K. Lockdown

(Bloomberg) -- The number of troubled real-estate loans in the U.K. has surged to the highest since the global financial crisis after the past year’s series of lockdowns pummeled borrowers that own business properties.

Defaults on commercial-property debt rose to 4.6% last year from 3.2% in 2019, a near 44% jump, according to a survey conducted by the Business School, part of the University of London. That pushed the total of under-performing loans -- including those in default or where one or more of the terms have been breached -- to 8.6% of all outstanding loans, the survey found.

U.K. landlords have been temporarily banned from evicting companies that fail to pay rent since the coronavirus pandemic began, a measure that’s hit retail and hospitality owners particularly hard. That’s accelerated the plunge in brick and mortar store values, pushing up the relative indebtedness of some properties and breaching some of their loan agreements.

“For those of us at the coalface of commercial real-estate lending, 2020 was an incredibly challenging year,” Neil Odom-Haslett, President of the Association of Property Lenders, said in a statement accompanying the report.

The pandemic also caused a 23% drop in the volume of new lending from a year earlier as banks shied away from new business in the face of deep uncertainty over property values. And those loans that were written were more expensive, with borrowing costs rising for everything but warehouses.

Loan margins for even the best stores are now at record highs, increasing by 82 basis points compared to a year earlier. Borrowing costs for lower-quality shops are at their highest since 2012, the survey found.

“We predict that real-estate lending will become more expensive and require further capital for borrowers across the next two to five years,” report author Nicole Lux said in the statement.

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