Most lenders to the UK's investment property market will be unable to shrink troublesome loan books for the foreseeable future, despite much of this debt being under water, analysts claim.
Some £50 billion out of £280 million of loans arranged in the markets during the 2004 to 2007 boom are now worth more than the underlying properties, according to property consultants Savills.
'My guess is that at least 75% of all loans are in breach of at least the LTV (loan to value) covenant,' warned William Newsom, head of valuation at Savills UK.
He added that around half of existing lenders also plan to decrease their loans to the sector this year so foreclosing on the debts of property owners may not be an option because the lack of financing makes it difficult to find new buyers. Banks are also reluctant to sell into a falling market.
As an alternative to calling in the debt, most lenders are extending repayment periods, in some cases by as much as eight years, while renegotiating loan terms at higher margins, Newsom said.
He believes that the next five to ten years will be about managing existing loans for the banks who are effectively the new property owners, in partnership with their borrowers.
However banks in Germany and the UK in particular are willing to lend. Of 22 banks willing to originate loans of above £10 million in value, 10 are German lenders and eight are from the UK, including Barclays, Lloyds, and HSBC. Just two German banks, DG Hyp and Eurohypo are willing to make loans of above £100 million pounds.
Mat Oakley, head of commercial property research at Savills, expects UK investment sales for the first six months of 2009 to be higher than in the second half of last year, and thinks that this signals the property market has turned the corner.
While buyers have so far concentrated on top-end buildings with long leases and strong tenants, he expects to see a new wave of risk-loving investors, keen to take advantage of the massive discounts currently available.
'We will start to see the opportunistic deals coming in, and the best deals will be done before the herd returns in 2010, 2011,' he said.