Banks are being forced to renegotiate loans with their landlord clients, in the hopes of riding out a continued slump in the commercial real estate market which has prevented owners from selling their buildings, according to industry insiders.
Lenders in the UK and across Europe are asking for building owners to put up more equity, revising the interest rates on loans and striking refinancing deals as some building owners start to breach the covenants of their loans. Landlords are also engaging with their lenders to extend the terms of their loans, and asking them to flex the conditions so that they do not breach covenants.
The deals come amid a sustained downturn for the commercial property market, which has hit valuations and led to a log jam in the deals market.
Lenders are co-operating, and rolling over the loans so that clients do not have to sell buildings at cut prices — a measure dubbed “extend and pretend” or “delay and pray”.
Risk management: Property
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But as this tactic drags into its third year, some believe that this is not sustainable, and losses will have to be realised.
“I don’t think it can carry on indefinitely,” says David Eden, managing director at the restructuring group Kroll. His company is increasingly being engaged by lenders to draw up business improvement plans for buildings to put them on a more financially stable footing.
As interest rates rose to counter post-Covid inflation, property valuations took a hit as debt became more expensive. Data from property analysts at Green Street shows that office values in London have shed 37 per cent of their value since the start of 2022.
This valuation drop froze the deal market — between 2022 and 2023 analysts at MSCI found that transaction volumes globally fell by 45 per cent.
Even some of the City of London’s most famous properties have felt the pain. The sale of the “Can of Ham” building fell through last December, for example, because of disagreement about the valuation.
Interest rates have started to fall around the world but at a slow rate, so valuations have remained depressed.
A report from Bayes Business School said that in 2024 there was a “modest recovery from a generally poor performance in 2023” in the commercial real estate market in countries such as the UK and Germany.
The rut has forced landlords to negotiate with their lenders — which are increasingly alternative lenders such as debt funds — to seek extensions on their loans in the hope that valuations will eventually return. As loan to value ratios for buildings increase, more landlords are also breaching the covenants of their loans.
Andrew Antoniades, the head of lending at CBRE, the property consultancy, says that for the most part lenders have been happy to find a solution by adjusting loan terms. He adds that it was also not in the lenders’ best interest to force a sale of a building as they would also not recoup their loan, and the market can shift fairly quickly.
“The phrase delay and pray has been well used,” he says. “It almost implies ‘let’s just see what happens’. There is an element of that because sometimes these valuations can come back within a quarter. In which case, there is a duty in some sense for a lender to not use these things just to their advantage and default a borrower.”
He adds that lenders are using a range of tools to gain more comfort on a loan that may have breached covenants. Interest rate alterations, asking landlords to put in some equity and refinancing with other lenders are all used to restructure loans to make them less risky. “There tends to always be the solution,” he adds.
But the situation cannot carry on indefinitely. Private capital firms, which make up a growing pool of commercial property lenders, are under pressure to return cash to their investors, especially if they operate a time-limited fund. That means that some will be forced to cut their losses and sell up, especially if they want to start fundraising for their next round.
Eden at Kroll says that some lenders, especially to the residential sector, will have to take some losses. However, he adds that these are different from the dark days on the eve of the financial crisis. Now, the property sector is significantly less indebted, meaning that losses will be less painful. “There will be some losses on loans but on loan to value breaches we’re not talking GFC [great financial crisis] era . . . You look at creeping changes to value.”
Jess Qureshi, an analyst at Knight Frank Capital Advisory, says: “The key difference to previous [episodes] is the leverage levels that people are at are so much lower. So while values might have dropped the amount of debt that people have taken on is much more conservative on the whole than what it used to be.”
That may bring at least some relief, if temporarily, to the backers of London’s biggest buildings.
