The fall in UK property values could cause securitised loans worth £2.4bn to go into default.

Credit rating agency Fitch warned today that it had changed its rating to ‘negative’ on four commercial mortgage backed security (CMBS) transactions it had rated that included UK property as collateral.

The four CMBS transactions were issued by Lehman Brothers, Morgan Stanley, Deutsche Bank and a consortium of Credit Suisse and Capmark.

Refinancing problems

Fitch said that the fall in values could mean that the CMBS loans could not be refinanced when the loans matured.

CMBS loans were vital in fuelling properties recent bull run, as they allowed some banks to move loans off their balance sheets and thus lend more money at cheaper terms.

The four transactions were all made in 2006 and early 2007, when values were at their highest. All four transactions mature before 2011.

Insufficient values

‘Although rental income from current tenants is generally stable, the main concern currently is that property capital values may be insufficient to allow final principal repayments at loan maturity,’ Rodney Pelletier, managing director at Fitch's structured finance team, said.

‘Most CMBS transactions rely heavily on the sale or refinancing of the charged assets - in most cases commercial property - for repayment of its debt. As values fall, the likelihood that a sale or refinancing will deliver sufficient funds to make such a principal payment reduces.’

Fitch said that the loans at risk account for only 11% of the loans it rated in 2006 and 2007, and that the tranches of debt at risk accounted for only 2.2% of the total securitised.