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Eurozone crisis stifles commercial sector lending, study reveals

Banks have become more reluctant to lend to to the commercial property sector in the face of the Eurozone crisis, according to a new report.

The news will be of concern to the construction industry after commercial offices in central London provided one of the few bright spots in the first half of 2011.

The UK’s Commercial Property Lending Market report by De Montfort University, published today, analyses the lending activity of the major commercial property lenders in the UK during the first two quarters of 2011.

It reports the number of lenders willing to lend against a fully pre-let development fell from 52 per cent to 31 per cent, and those willing to lend against speculative development fell from 17 to 15 per cent.

It found that the value of outstanding, on-balance-sheet debt fell from £208.4 billion to £201.3bn in the six months to June 2011, a reduction of 3.4 per cent. The study also said 56 per cent of this debt, in a range of between £85bn and £114bn, could not be refinanced on current market terms, and that one quarter was secured on a loan-to-value ratio of more than 100 per cent.

The study estimated total UK debt of between £280bn and £292bn at mid-year 2011 - down from £288bn to £298bn at the end of 2010 – including £46bn outstanding in the commercial mortgage-backed security market and an estimated £19.9bn held by Ireland’s National Asset Management Agency, set up to chase debt.

The report says this has continued the measured reduction in debt seen during 2010 that has so far avoided a “fire sale” of property assets and a collapse in capital values.

But it found that the uncertainty triggered by the deepening Eurozone crisis and the lack of growth in the UK economy had hightened the ongoing lack of liquidity and increasing costs of capital in the property lending market.

Report joint author Bill Maxted said: “Respondents have suggested that only an increase in confidence in the UK economy, demonstrated by a number of quarters of sustained growth in UK GDP, would signal a recovery in the commercial property market in the UK.”

London and the South East were seen as being in recovery mode, but recovery in the provincial markets could take six years or longer.

Liz Peace, chief executive of the British Property Federation, said: “These figures underline how critically important it is for government to use all of the tools at its disposal to help tackle this overhanging property debt.”

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