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Bnp Paribas Real Estate Recovery Survey Of Banks Final

Jul 31, 2015



1. RESEARCH HOW BANKS ARE DEALING WITH THE ROAD TO RECOVERY JULY 2009 2. intRoduCtion: lEnding And tHEHow ARE bAnkS Coping witH tHAtbuRSting of tHE pRopERty bubblEdEgREE of ExpoSuRE to CollApSEdBank lending to commercial property was at a record vAluES?high of over 175 billion in June 2007, when the propertySome comfort for banks is provided by the margin between the loaninvestment market turned from boom to bust. With anmade and the value of the building. Banks typically restrict the loan-unstoppable momentum, lending continued to increase andto-value (LTV) when lending, to control the exposure to the borrower and the March 2009 had reached 244 billion. Values, however,had now fallen by 41% from June 2007, back to the levelIn 2003 the average maximum LTV was 78% on a prime office or retail property, though it was possible to obtain a 90% LTV. Theof March 1998. Between these two dates, bank exposure average maximum rose slowly to 80% in 2006. After the bubble bursthad increased five-fold, financing the biggest boom in UKthe LTV available dropped to 77% in 2007 and to 75% in 2008. Butcommercial property values since the 1980s.the damage was done.Total lending Net lending We can illustrate the degree of the difficulties for banks with some 30012 simple figures. Over 25 billion of net additional lending was made in 2006. If all those were new loans, made at 80% LTV, then the 25010 properties supporting those loans were worth 31 billion. Between 2008 the end of 2006 and 2007 property values fell 7.7%, reducing the value of the property to 29 billion and raising the implied LTV Total lending billion Net lending billion 1506to 87%: uncomfortable but manageable. During 2008 values fell a further 26%. The value of the properties was now only 21 billion 1004 and the implied LTV rose to 118%. The value of the properties was502now less than the loans outstanding. These numbers, based purely on averages and estimates, nevertheless give the flavour of the0 0 problems facing lenders in 2009. Loans made near the top of the-50 -2 market at maximum LTV are now under water, being worth less than the debt used to buy them. -100 -4 Almost 90% of lenders replying to a survey by de Montfort University,88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 had loans in breach of covenant. Three-quarters of the respondents Source: Bank of England accounted for 3,770 loans in default, amounting to over 10 billion pounds. Yet the surprising feature of this cycle is the low number of borrowers placed in administration and the small number of forced sales. REITs, property companies and funds have sold property to raise capital, but not on the scale expected from the size of the problem. What have lenders been doing with their problem loans, particularly those which are in breach of their LTV conditions? We talked directly to those who are involved to develop a better understanding of what is triggering their decision making. That led us to wonder how lenders view the future and how far that is consistent with history and with current forecasts of both the economy and property market. Recovery Report July 2009 3. tHE SuRvEy SECtion 1: How did pEoplE viEw tHE We had three guidelines in setting up the survey. It had to beEConomiC CRiSiS? confidential, which meant using an experienced and respected agencyThe property bubble burst in June 2007, 12 months before the to carry out the survey. We needed to have responses from senioreconomy slipped firmly into recession, in the second quarter of lenders and from those involved in recovery, including accountancy.2008. What kind of impact was this combination of financial and Since there are complex issues to be explored, we needed to do thiseconomic crisis having? by telephone interviews.The economic downturn has affected lending and recovery decisions We had 30 responses from a range of interviewees. Since we exploredfor almost all of our respondents. issues we have an analysis of responses rather than people. An interviewee may have mentioned more than one issue in response Whilst some bankers commented that lending had simply ceased, to a question. The percentages given in the analysis are of mattersa greater number commented that decisions were more focused on raised by interviewees rather than interviewees themselves.quality and as such tended to be more difficult and slower.Some 6% continued to actively lend. At the opposite extreme almosta quarter of respondents had stopped lending and a further 6%were focusing purely on existing loans. Over 30% reported some ExECutivE SummARyconstraints on lending, such as the need to pay close attentionto the quality of the borrower and the fact that the process ofapproving loans was taking longer and was more difficult. Those Over 50% of respondents did not think that economic conditionscomments match the sentiment of our investment agents who had would change much over the next yearreported loans approved at the initial level being turned down by Most respondents see property as having a significant impact credit committees. on the overall economy due to its size and the increase in recentThe more general impact on lending policy was picked up on by 22% property market related issuesof the respondents. The growing pressure on banks for improved Banks tend to look at loan holders on a case-by-case basis toperformance and profitability was cited. Respondents also mentioned establish whether the loan is worth its continued investment orthe internal requirement to set aside more capital. whether a restructure or termination is in the banks best interestsMost respondents seem to expect either no change or even a The most common cause of a loan being called in was the failureworsening of the economy and property market before lending of tenants, quickly followed by the lack of additional funds and improves. increased financial pressure on the company or missed payments.Over 50% of respondents believe economic conditions would not Falls in LTV accounted for less than 15% of loans being called inchange much. A fifth are worried conditions would change for the Almost 50% said that an LTV breach was not reason enough to call worse. There are a few optimists, who thought new lending will be in a loan and that additional capital or equity injection would be a limited to existing customers. This importance of concentrating on plausible action for breached LTV covenant existing customers was already apparent from anecdotal evidenceand is re-emphasised in later questions. A further 17% said that they would waive the breach or take no action, with 15% negotiating or restructuring the loan How significant is property for the banks, given the broad range oftroubles they currently face? Over a third of those interviewed said that there had been no change in their risk assessment procedures as these were already The overall feeling is that they are very significant, given the scale of well lending and the severity of the crisis the market is facing. Most of those interviewed pointed to the lower interest rates andA fifth, on the other hand, were somewhat dismissive, suggesting the faster more global decline as the main differences between that property is not that important. Others, similarly unimpressed, previous recessions and the current crisis pointed out that property is simply one of a variety of challengesfaced by the financial industry. Over 80% of those interviewed said that the recapitalisation of the banking system had no affect on their approach to breached loans A third of respondents felt that the government intervention was a positive action, with a further 20% saying it was a necessity to avoid total collapse The majority of respondents believe that recovery in the property sector will come within the next two years, some are less optimistic and looking to 2013 Over 50% of respondents thought that the return of confidence was the key to the beginning of recovery, with just under a third pointing to an improvement in lending as the key factor A fifth of bankers thought that there would be no long-term problems or issues that will outlive the recovery, while only a sixth thought that the outcome would be that banks will be more conservative or prudent.I3I 4. SECtion 2: dEAling witH loAnSQ. What is the most common cause of a loan beingcalled in at the present time? When borrowers are in difficulty this becomes problematic for the lenders. How are problems identified and what triggers action?Tenant defaults/Tenant quality 22.9%Q. How are the problems you are encountering with loan holders being dealt with?Lack of additional equity/funds20.0%Increased nancial pressure on company/missed payments 20.0% Recover as much moneyas possible 6.5% Borrower seeks a reductionLack of expected sales 14.3%in repayments 6.5%IndividualassessmentMore capital/investment by the bank 29.0%Falls in LTV11.4% for the deal 6.5% Diversion of rental income5.7% Waive the covenant 6.5%Fall in letting demand5.7%Approach varies case Most of our default is caused through tenant failure and the by case basis 9.6%(in)ability of the borrower for whatever reason to inject additionalmoney. Before the drop in commercial property value the borrowerDiscussion with theloan holder 19.3% was quite happy to put additional money in because it was protecting Appoint a receiver his equity Theyre more reluctant to do that todayor administrator 16.1%The single most mentioned trigger area is tenants defaulting or loss ofquality or covenant strength. The latter could easily be the first step Banks tend to look at loan holders on a case-by-case basis to towards a default. This was raised by over 20% of interviewees. establish whether the loan is worth its continued investment orChanges in market conditions trigger concern in just under a fifth. whether a restructure or termination of the agreement is in the bestThis might be a fall in lett

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