It was always going to be a long haul, but William Newsom, head of valuation at Savills, speaks of a "change in sentiment" among his banking clients over the last six weeks. Yes, property values have staged a recovery, but those attempting to offload assets have uncovered a new £10bn problem – the cost of unwinding interest rate swaps.
The banks now have a much better idea of what's on their books, but new conundrums are emerging. Complicated loan structures, government assistance schemes and new banking regulations all add up to one thing - the banks will have less money to lend to property going forwards. Here's 10 reasons why it will take a decade to resolve:
1). It’s big, bad and ugly
Commercial property loans worth £121bn are due for repayment by the end of 2012, according to the recent De Montfort banking survey. A gobsmacking figure, says Mr Newsom, noting that banks are "unwilling lenders". So if the banks are unwilling to refinance this debt, what will happen to it? Known as the 'funding gap', large amounts of equity are being mobilised to buy real estate assets – probably enough to match the bank’s liabilities. The problem is, those with money want to buy cheap – but low interest rates and government assistance schemes mean the banks are in no hurry to sell at knock-down prices. "There isn't a word to describe the size of the problem that banks have," says Natalie Howard, head of real estate at AgFe Group. "It will take five to 10 years to work through it."
2). The £10bn cost of unravelling swaps
Interest rate swaps seemed a sensible way of hedging risk on property loans. In reality, Savills estimates the unprecedented period of low interest rates has created a potential £10bn liability - and it's making distressed asset sales unviable. Restructure the loan, and you'll have to cancel this swap – at a cost. It's a massive problem, as 57 per cent of the UK's £250bn property loans have interest-hedging swaps in place. Savills estimates that unwinding a 5-year swap currently costs nearly 12 per cent of the original loan amount, rising to over 20 per cent for a 30-year swap. Yes, you did read that last figure correctly.
"We know of situations where 20 or 30-year swaps are in place," says Mr Newsom. "In the halcyon period, property investment yields were very low. It was cheaper to raise long-term money than short-term, and a 30-year swap could make the cost of debt a whole percentage point cheaper."
Listed property firm Hansteen paid €20m to cancel swaps on its recent €250m distressed purchase of a German industrial portfolio, but many potential deals have fallen through due to unwinding costs.
