According to CBRE, Britain’s commercial property market face considerable loan penalties of up 23% simply to cancel rate-swaps put in place by the UK’s biggest banks.
These huge costs are hindering vital bank restructurings which aim to create a foothold for property firms, and support Britain’s recovery from the recession.
These rate-swap penalties are likely to have a knock-on effect on high streets and industrial parks which will in turn, suffer from a lack of funding, possibly leading to disrepair. Furthermore, Landlords who have lost assets no longer have any financial stake in maintaining shops, factories and office space which would normally attract tenants.
Phillip Cropper, head of real estate finance at CBRE told press, “In a challenging market, this is frustrating the recovery process as lenders try to deleverage their balance sheets. It also penalises other investors seeking to dispose of performing assets. The irony of this phenomenon is that swaps were intended as an instrument to protect investors from the risk associated with rising interest rates. However, at the peak of the market no one anticipated that we would enter such a prolonged low interest rate environment.”
William Newsom, UK head of valuation at Savills Commercial, estimated that over 90% of bank lending secured against commercial investment property before 2009 was subject to a hedging product.
Analysts also suggest that private landlords who shorten lease lengths are creating a ‘ticking time bomb’ for banks, as the quality of assets is reduced in relation to the shortening lease lengths.