LONDON (Reuters) - Almost a quarter of commercial property loans in Britain are higher in value than the underlying real estate, a study showed on Friday, highlighting the toxic legacy of reckless lending before the financial crash.
The figure grew to 23 percent at the end of 2012 from 20 percent a year earlier, according to De Montfort University, or about 45 billion pounds of a total of some 195 billion.
The increase means the worst-quality loans are deteriorating as property prices drop in many parts of the country, exacerbating the problem for banks as they attempt to purge their books of property debt amassed during years of profligate lending in the run-up to the crash.
The rise was due to the severity of Britain’s economic slump outside London and means banks hold a growing number of poor-quality loans that will hinder attempts to clean up their balance sheets.
The so-called loan-to-value ratio typically rises above 100 percent when the value of a property falls, potentially triggering a breach in the loan deal, which banks can waive if they believe property markets will recover.
While property values have recovered since the crash in London, driven by global investors seeking a safe place to park cash, other areas of the country have experienced falls of 40 or 50 percent, with prices still falling in many areas as the British government struggles to kickstart economic growth.
“Banks have good, bad and ugly loans but the ugly is getting uglier,” said Philip Cropper, an executive director and debt specialist at property consultant CBRE. “It means a more protracted clean-up for the banks.”
The issue also means lenders will increasingly curb credit for all but the safest deals and the most blue-chip of developers, widening the gulf further between London and the rest of the country, said Peter Cosmetatos, director of policy at the British Property Federation.
Banks including Lloyds and RBS have sold portfolios of real-estate debt at steep discounts to investors like Blackstone and Lone Star in recent years as the clean-up process began and the report shows steady progress.
Outstanding property debt for all types of lenders shrank by 7.7 percent last year from 214.4 billion pounds to 197.9 billion.
The De Montfort study was based on data from 78 of the biggest lenders in the UK.
Editing by David Holmes