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Commercial real estate spotlight: non-performing loans

Harry Iles
28-Jun-2024 12:21:10

A quick look under the bonnet

Most commercial real estate professionals are only too aware of the influence that the debt markets have on the day-to-day running of our industry. Debt greases the wheels of most of the deals we’re involved in, as it does the wider economy: most large acquisitions and the businesses of tenants all rely on debt for a variety of reasons.

Of course, it is not only property professionals who are acutely aware of this, but also the man on the street. Interest rates impact the cost of our mortgages and, for the renters (37.3% of the population1), the mortgages of their landlords. With increased interest rates, the burden to service this debt becomes greater and, ceteris paribus, default rates on loans increase.

But what happens in the background, behind the scenes at the bank? I wanted to take a quick look under the bonnet of the commercial loan industry to better understand the inner workings of the banks and their workout teams processing their non-performing commercial property debt, with the aim to identify ways in which repossession can be more easily averted and also (more opportunistically) how to best access investment opportunities from the non-performing loan (NPL) workout teams.

My curiosity led me to PwC’s London HQ (rated BREEAM2 outstanding) on the South Bank. If you’ve not been, it is an impressive set up. Neighbours to the Mayor of London, the offices comprise 48,000 sqm and it was here that I met with Panos Mizios, a Director in PwC’s European credit team. Panos specialises in loan portfolio transactions and has advised on deals with a debt face value of over €250bn during the past 15 years. I asked Panos for an overview on the mechanics of his team and to share some insight into their communications with client lenders.

How to avoid having your loan being classified as an NPL?

One thing that struck me was the active management of loans. Even while you are dutifully servicing your debt and before any covenants are brought into question, there is a traffic light system employed by the lenders that flags up any increased risk that might occur during the loan. For example, this could simply be something as benign as rental income exposure to a certain type of tenant. Not only that, the bank and workout team will proactively be looking to package up your debt with other analogous loans, to expedite/optimise a sale, should the worst happen. It makes sense when you think about it — why waste time reacting when market sentiment moves in nano seconds and, at any given time, sits on a knife edge.

Speaking with some of my own, existing lenders in the UK and Germany, (both clearing banks and debt funds) I asked for their advice on the best way to avoid being drawn into an NPL scenario and the dreaded forced sell, should equity be tight. One word reoccurred — “COMMUNICATION”. Bankers are human beings too. The more you can keep your bank’s relationship managers in the picture, the more they’re likely to work with you and give you the benefit of the doubt. The same is true in the landlord and tenant relationship of course. No-one likes surprises when it comes to unfulfilled income expectations.

How to best access properties from within the NPL structure?

Communication will help buy some time, but if you can’t service the interest, the bank will eventually be forced to take control and look to sell the asset to recoup their loan. It’s part of the property circle of life. 

How then can we get in early on those (often lucrative) distressed deals? Panos’s advice was to stay in the loop with the workout teams and make sure that your offer is deliverable. He then said something I hadn’t previously thought of but made perfect sense. When you present an offer, make sure that the business plan is clearly communicated. It must not present a risk of embarrassment to the lender by, for example, flipping the asset in a very short timeframe, posing questions of the thoroughness of the bank’s marketing process. “Post-Lehman, reputation is the number one focus for the banks — it’s everything.”

According to current Sterling interest rate swaps prices, market expectations are for Sterling short term interest rates to decline below 5% by mid-2025. With falling rates, the pressure on lenders to service debt interest should ease and might well give cause for banks to exercise commercial pragmatism and work with borrowers in financial distress — to avoid the NPL scenario.


1. Housing, England and Wales: Census 2021 (Office for National Statistics).

2. The Building Research Establishment Environmental Assessment Method (“BREEAM”), is a sustainability certification method for many types of real estate. It uses 10 different measurement categories such as management, energy, water, waste, pollution, and more, to rate a building’s environmental performance and give it a score.

Harry Iles is a Sterling board advisor and commercial real estate investor, developer and asset manager.


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