UK banks brace for property loan losses from Covid-19 economic hit

British lenders are bracing for a hit from commercial property loans as shopping centre developer Intu Properties becomes the first such firm to ask for emergency relief following the coronavirus outbreak.

Barclays, HSBC Holdings, Ulster Bank-owner Royal Bank of Scotland, and Lloyds Banking Group had £49.3bn (€54.5bn) in outstanding UK commercial real estate loans at the end of last year, according to public documents.

Most retail and leisure sites have been deserted since the UK was put into lockdown in March. 

Commercial landlords are banned from evicting tenants who fail to pay until the end of September, threatening a cash crunch for property owners as third-quarter rent comes due.

Intu, which owns some of the country’s largest shopping centres, has said it will fall into administration unless lenders relax their terms. 

Barclays, HSBC, Bank of America, and Credit Suisse provided a £600m revolving credit facility to the London-listed firm. 

Intu has about £4.5bn of debt overall, most of which is secured against its properties.

The rundown of how much Britain’s biggest banks are exposed to commercial property includes HSBC Holdings Property whose debt is one of the largest chunks of HSBC’s corporate loan book, making up about a fifth of its lending. 

At the end of last year, the bank had €19.4bn of real estate loans in its UK corporate and commercial lending book. About €839m was classed as stage 3, which the bank defines as “in default or otherwise credit-impaired”. A further €2.6bn of borrowings were at stage 2, meaning the bank had seen a “significant increase in credit risk”.

Lloyds Banking, the UK-focused bank, has almost £14bn tied up in its direct real estate business, about 60% of which involves commercial properties, according to its 2019 annual report. 

Lloyds, which makes most of its loans in residential property, has already flagged potential impairments linked to the wider economic impact of the pandemic.

Barclays had about £9bn exposed to commercial real estate at the end of 2019, a slight rise on the prior year. Just 2.8% of these loans were stage 3, or credit impaired. Barclays made its biggest quarterly provision in a decade in April to prepare for the economic fallout from Covid-19.

RBS, the UK government-owned lender, had £14.7bn of UK commercial real estate exposure in its 2019 annual report. These loans were made to firms investing in or developing properties, RBS said in the report. About £5.4bn of the total is tied up in retail properties including stores on shopping streets, shopping centres, restaurants, bars, and gyms -- although these sums are dwarfed by the bank’s exposure to housing loans, which face their own coronavirus challenges.

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