HSBC 2015 Annual Report Download - page 139

HSBC HOLDINGS PLC
137
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Commercial real estate
Commercial real estate lending
Europe Asia MENA
North
America
Latin
America Total
$m $m $m $m $m $m
Neither past due nor impaired 24,533 32,182 466 6,659 1,086 64,926
Past due but not impaired 89 119 25 212 9 454
Impaired loans 1,634 70 199 161 482 2,546
Total gross loans and advances at 31 December 2015 26,256 32,371 690 7,032 1,577 67,926
Of which:
–
renegotiated loans12 1,586 6182 150 210 2,134
Impairment allowances 613 35 145 76 343 1,212
Neither past due nor impaired 25,860 35,430 333 6,136 1,535 69,294
Past due but not impaired 18 170 47 100 28 363
Impaired loans 2,309 78 199 322 728 3,636
Total gross loans and advances at 31 December 2014 28,187 35,678 579 6,558 2,291 73,293
Of which:
–
renegotiated loans12 1,954 19 183 191 377 2,724
Impairment allowances 909 44 147 101 476 1,677
For footnote, see page 191.
Commercial real estate lending includes the financing of
corporate, institutional and high net worth individuals who
are investing primarily in income-producing assets and, to a
lesser extent, in their construction and development. The
business focuses mainly on traditional core asset classes
such as retail, offices, light industrial and residential
building projects. The portfolio is globally diversified with
larger concentrations in Hong Kong, the UK, the US and
Canada.
In more developed markets, our exposure mainly
comprises the financing of investment assets, the
redevelopment of existing stock and the augmentation
of both commercial and residential markets to support
economic and population growth. In lesser developed
commercial real estate markets our exposures comprise
lending for development assets on relatively short tenors
with a particular focus on supporting the larger, better
capitalised developers involved in residential construction
or in assets supporting economic expansion.
Our global exposure is centred largely on cities representing
key locations of economic, political or cultural significance.
In many lesser developed markets, industry is evolving to
move away from the development and rapid construction
of recent years to increasingly focus on investment stock
consistent with more developed markets.
Excluding the effects of the Brazilian reclassification,
commercial real estate lending was lower by $4.5bn
including decreases of $3.2bn relating to adverse foreign
exchange movements.
The commentary that follows is on a constant currency
basis, while tables are presented on a reported basis.
The commercial real estate lending was lower by $1.3bn,
largely due to a decrease of $2.6bn in Asia, mainly in
Hong Kong and, to a lesser extent, mainland China and
Singapore. The decrease in Asia was mainly due to the
repayment and maturity of loans and was partly offset by
increases of $1.0bn in North America and $0.4bn in
Mexico. Europe and Middle East and Africa remained
largely unchanged.
Refinance risk in commercial real estate
Commercial real estate lending tends to require the
repayment of a significant proportion of the principal at
maturity. Typically, a customer will arrange repayment
through the acquisition of a new loan to settle the existing
debt. Refinance risk is the risk that a customer, being unable
to repay the debt on maturity, fails to refinance it at
commercial rates. We monitor our commercial real estate
portfolio closely, assessing those drivers that may indicate
potential issues with refinancing. The principal driver is the
vintage of the loan, when origination reflected previous
market norms which do not apply in the current market.
Examples might be higher loan-to-value (‘LTV’) ratios and/or
lower interest cover ratios. The range of refinancing sources
in the local market is also an important consideration, with
risk increasing when lenders are restricted to banks and
when bank liquidity is limited. In addition, underlying
fundamentals such as the reliability of tenants, the ability to
let and the condition of the property are important as they
influence property values.