Trickle of bad UK property loans set to turn into a flood

London

THE number of soured UK commercial property loans started rising in 2019 for the first time in eight years. Now, it is set to skyrocket.

The coronavirus outbreak will trigger as much as £10 billion (S$17.6 billion) of losses and write-offs on loans tied to UK stores and malls, a survey of lenders by Cass Business School estimated.

That is 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.

"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 UK 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 has 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 of commercial property loans due to be refinanced this year and in 2021.

"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 of such loans are affected by delays and defaults on construction contracts, with £14 billion of residential development loans also at risk of being partially written off, the report warned.

Overall UK property lending fell 12 per cent to £43.8 billion last year, mirroring a decline in transaction levels during a period marked by heightened Brexit uncertainty, the survey found. BLOOMBERG