Corporate finance adviser Close Brothers has warned that banks and investors in the UK property sector must look at broader restructuring and refinancing solutions to avoid a ‘second credit crunch’.
It said that UK commercial property faced a potential £140bn price fall if values continue to erode – which would leave most companies in breach of their LTV covenants – and a £125bn debt refinancing bill over the next four years.
Banks are exposed to £250bn of UK commercial property debt, 50% of which needs to be refinanced in the next four years, according to De Montfort University.
Close Brothers said it believed the scale of this issue had not been fully appreciated and would trigger further write-downs and, combined with the impact of a worsening wider economy, a second credit crunch in due course.
Gareth Davies, managing director in Close Brothers’ European restructuring and debt advisory group, said: ‘The commercial property world has not seen a significant downturn since the early 1990s when the financing structures deployed were much simpler and less aggressive.
‘Banks adopted a strategy of selling assets into a distressed market however; this caused a death spiral with ever decreasing prices. Therefore, alternative solutions to restructure the indebted sector are required this time round, for example debt conversions, new third party investment or partial asset sales.
‘There will be significant risk and difficulty of implementing a consensual funding strategy between the multiple stakeholders in these complex structures. For instance, there will be many differing agendas to align.
‘In addition to enhancing the risk of a restructuring or refinancing failing, secondary market investors will increasingly take advantage by acquiring ransom strips with the aim of exploiting their nuisance value to be refinanced or bought out at a profit further amplifying the problem.’