Road to recovery

The commercial property lending boom is over and the market is taking its first tentative steps on the long road to recovery, according to recent research.

According to the latest study of bank lending to commercial property by De Montfort University, debt secured by the UK real estate sector went down for the first time on record by 0.6% falling from £225.5bn (year-end 2008) to £224.1bn (2009 mid-year).

However, loans in breach of financial agreements doubled in the first half of 2009 to around £30bn, with £18.6bn reported in breach of covenants and £11.8bn in default – the equivalent of South Africa’s entire commercial property market.

But despite the well-publicised problems of a number of key lenders, banks have retained their faith in property. The number of active banks is rising and debt is available, albeit in more limited quantity and at higher prices than previously.

While many feared large fire-sales of assets as banks called their loans in, this has not happened as yet. Since property values fell by around 45% since the peak of the boom in 2007, many were in breach of loan agreements which are set against the value of the property.

The steep and rapid drop in values meant that many property firms were, like home owners, facing a negative equity time-bomb.

Liz Peace, chief executive of the British Property Federation, said: “There is clearly a process underway of banks reducing their exposure to commercial property, but it seems likely to be a slow and long drawn out one.”