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Property’s Biggest Lenders See Uptick In Stressed Loans

The Bank of England

Three of the biggest lenders to the UK commercial real estate sector have seen an uptick in loans under stress as a result of the coronavirus pandemic.

NatWest (formerly RBS), Lloyds and Santander UK all said in recent half-year results they had seen an increase in property loans being managed by business support units or where they were facing the prospect of losses, although none of the banks has yet seen a major spike in distressed loans.

NatWest is the largest lender to UK commercial property, with a portfolio totalling £25B. In results for the six months to 30 June, it said loans in stage three of expected credit losses had risen from £696M to £1B in the first half of the year. Stage three loans are ones where the loan is impaired, and there is the likelihood of a loss. 

The amount of loans in stage two of expected credit losses rose from £1.3B to £8B. These are loans where credit risk has increased significantly. NatWest said the increase in loans it has to actively monitor was concentrated among a few large names in the retail property sector.

“While new activity in H1 2020 was subdued due to COVID-19, NatWest has supported existing customers with capital repayment holidays, interest roll-ups and extensions using CRE specific criteria and government-backed COVID-19 support schemes,” the company said in its results.

“The retail and leisure sectors were heavily affected by the government-imposed lockdown, resulting in low rental payments. The office sector was more resilient overall, albeit the smaller serviced-office sub sector came under some stress given the short-term nature of income and site closures. Demand for office space in the medium-term is expected to decline with flexible working trends continuing post COVID-19.”

Its central scenario is that UK property prices fall 16% in 2020, before growing by 2% in 2021 and 6% in 2022. Overall the bank said it has taken a £2.1B impairment to account for loan losses in the second quarter of 2020, compared to an £800M impairment in the first quarter, and expects impairments on loans of £3.5B to £4.5B this year. 

Lloyds Banking Group has a £13.8B commercial real estate loan portfolio, making it the second-largest lender in the UK. It did not provide a breakdown of the expected credit loss position of its property book in its half-year results but said only 15% of the book, equating to £2B, is in retail, and that the portfolio has an average loan-to-value ratio of 49%, with no speculative development. 

It did point to an increase in loans coming under pressure.

“Overall performance has remained good, although an increase in cases moving to watchlist and the business support unit has been seen, especially in the retail/shopping centres sub sector,” it said. “Overall rent collection for the second quarter of the year is expected to be more challenged than in the first quarter, particularly in the retail space given the number of closed stores, though the office sub sector is expected to be reasonably robust. Despite these challenges the portfolio is relatively well positioned and proactively managed with appropriate risk mitigants in place.”

Lloyds’ base case is that commercial property prices fall by 20% in 2020 before rebounding by 10% next year. Like RBS, it took a large provision to account for future loan losses, £3.8B for the first half of the year. It did not say how much of that was related to property.

The UK division of Spanish bank Santander is also a significant lender to UK property, with a £5.8B loan book. It has moved £400M of its portfolio to stage two of expected credit losses, it said in its own half-year results.

The commercial mortgage-backed securities market gives an insight into the kind of action banks and borrowers are undertaking behind these big-picture numbers. In sectors like retail and hospitality, borrowers are having to put up extra capital in order to secure covenant waivers.