Remember the ‘golden days’ of bank lending? Debt was at record levels and UK and Irish banks provided 70% of the total supply of debt. Banks were the close friends of real estate and lending volumes increased exponentially between the early 1980s and the mid-2000s.
However, as the economy began to falter so did the lender/borrower relationship. High street banks began to report a rise in loan-to-value covenant breaches. By 2009, the De Montfort Commercial Property Lending report estimated that £50bn of real estate loans were in breach or default. Banks became increasingly cautious and the lending environment tightened. So, no surprise that the Bank of England lending figures for Q3 2010 indicated a further slide in lending to real estate, down by £4.5bn between July and September and £5.2bn over the past year. Notably, this fall was in line with all other industries in the economy.
Yet the maturity profile of real estate debt is striking, with a refinancing wall approaching as facilities mature in 2011/12. Will there be sufficient bank liquidity for these loans to be refinanced – and at what price?
But regardless of these worries, ultimately banks are there to lend money. Right?
This year will be remembered as a low point in terms of new debt origination and liquidity will continue to be tight in 2011. Once liquidity and exposure issues are at least partly resolved, there will be opportunities for troubled borrowers who are prepared to build relationships – including work out scenarios: perhaps covering interest from rental income or injecting further equity as opposed to fire sales.
Perhaps correctly, there will be no immediate return to those carefree days: relationships will be cautious, there will be no more cheap dates, and they will increasingly be characterised by international lenders. Nevertheless, there will always be opportunities for the right borrowers with the right product.