14/12/2012 02:07 GMT

Commercial Property Debts Fall, But Lending For Developing Commercial Sites Also Deteriorates

The amount of money owed on commercial property has dropped, but less positively, lenders are still clamping down on spending on development.

Debt held against UK commercial property fell 4.3% to £204.1 billion during the first half of 2012, reported today in the UK Commercial Property Lending Market report by De Montfort University.

The survey of 74 lending teams from 65 banks and other lending organisations reported debt with a loan to value of more than 70% - the absolute maximum many lending organisations are likely to provide senior debt - fell by £12bn in the first six months of 2012 as lending organisations took action to rebalance their loan books.

However, of the £11.3bn of new lending only 5% was lent to commercial development, demonstrating the continuing draining away of development finance to this sector.

So why are banks and other lenders still hesitant to develop commercial plots if retailers and other owners are becoming more responsible about their mortgages?

Liz Peace, chief executive of the British Property Federation, told Huff Post UK: “Property lending became over-exuberant and risk was understood, analysed and priced inadequately as many – both investors and lenders – succumbed to the belief that values would continue rising through capital appreciation, so many chased volume up the risk curve, often failing to price in a way that properly reflected risk.

“A weak property market damages balance sheets – a process that typically takes time to recover from – and signalled a retreat from property lending.

"While the big boys will be able to access debt from alternative providers, the rest of the market has to compete for an ever decreasing slice of the pie."

There are still some regions where development growth is being achieved - notably London and the south east.

“Like the UK economy, property development is highly polarised between a strong market in central London and certain other parts of the country, and much weaker markets elsewhere," said Peace.

"Central London property is also viewed as an attractive asset class by lenders, particularly those with a low tolerance of risk. The position is very different in most regional markets, where values have continued to decline."

On 12 December, Huff Post UK reported the construction sector as a whole is still struggling with the grip of the recession, although wholesaler and retailer giant Travis Perkins was holding its own in the middle of the continuing fiscal crunch.

In its Autumn Statement, the government pledged to do more to help encourage the construction industry, pledging £1bn for building and repairing Britain's roads, and £270 million has been announced to fund improvements in further education colleges and £1bn to expand good schools and build 100 new free schools and academies.

And from October 2013 all newly built commercial property completed between 1 October 2013 and 30 September 2016 will be free from empty property rates for the first 18 months, up to the state aids limit.