COMMERCIAL
The £42 billion
problem
The chances are that a bit of it is yours. Andrew Hardcastle
explains how to deal with debt in tricky times.
ccording to the Financial likelihood is that re-financing with another recent years, many borrowers could be in
A
Times (15 May 2009), loans bank will be difficult, expensive or negative equity. Simple supply and
of some £42 billion to the impossible. Therefore, ensure that you are demand economics would appear to
commercial property sector fully compliant with the terms of your indicate that banks will be reluctant to
are due for repayment this loan/overdraft facilities, be it submitting compound the problem by flooding an
year, which threatens default accounts within the specified timescale, already depressed commercial property
for property companies struggling to raise providing the required cashflow market with more properties provided the
new money and puts further pressure on projections or maintaining the necessary interest continues to be paid. Accordingly,
UK banks to support corporate borrowers. loan to value ratio and minimum cash consider any need to ask your bank to roll
There is a risk of a multi-billion pound level. Also, inform the bank of any over/extend your loan. But, supply and
funding gap, given indications that many anticipated, material non-compliance. If demand again, be prepared for the bank to
banks will continue to retreat from lending appropriate, consider what (if any) seek to re-negotiate its fees, margins above
on commercial property in 2009, as the additional security you or a third party can base rate and loan to value ratios, or to
market continues to go through its worst offer the bank. Do not commit to anything demand a switch to margins over LIBOR.
slump on record. requiring additional bank finance without a
The number of loans in default and written undertaking from the bank that the PROPERTY INVESTORS
breach of covenant has already grown fast, advance will be forthcoming and, if that Be open to your tenants’ requests for
according to the Leicester Business School, undertaking is conditional, be sure that you relaxation of the strict terms of their leases.
De Montfort University survey of the can satisfy the conditions. For example, a tenant might request a
commercial property lending market Although it is hard to see how banks are temporary rent reduction or, for cashflow
published at the end of May. going to make up the shortfall (with over purposes, payment of rent monthly rather
two thirds of outstanding debt being due than quarterly. Provided you can still
KEEPING YOUR LENDER HAPPY for repayment by 2013), current indications service repayment of your loan, in bald
First and foremost, foster and maintain a are that we will not be seeing a return to terms, less rental income is better than
good working relationship with your the mass foreclosures seen in the early none at all, bearing in mind that your
existing bank. Many banks, rather than 1990s. Loan to value ratios of 80+ per cent refusal could result in the tenant’s
looking for new business, are looking to for much of this decade and commercial insolvency and empty premises could be,
reduce their levels of debt and the property values having all but halved in to say the least, difficult to re-let on
70 JULY-AUGUST 2009 PROPERTYdrum
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