New commercial property lenders fill funding gap27th March 2012

De Montfort University estimated in December 2011 that property lenders are stuck with up to £114bn of debt that cannot be refinanced in today’s market.

With 54% of UK Commercial Property finance agreements due to expire by 2014, according to the British Property Foundation, property investors and owner occupiers need to take early action to ensure that they will be able to refinance.

Craig Powell, Associate Director, Holloway Iliffe & Mitchell said: “Since 2007 the number of banks willing to lend on vacant office, industrial and retail property has fallen dramatically and new sources of debt are scarce.”

Good quality prime investments let to multi-national companies are still in demand by both investors and banks but empty commercial properties in poor locations or undeveloped sites can often be difficult or even impossible to finance via traditional lenders as they become much more risk adverse. Even occupied properties not located in the best locations can be affected as rents reduce at lease renewal or re-letting, which therefore reduces the rental income and the chances that a borrower may default on a loan.

These rental reductions and the growing divide between the supply and demand for older or obsolete commercial properties mean that some capital values have reduced by up to 50% over the past 5 years which often breaches the existing loan-to-value terms and can reduce the chances of an existing lender being willing to refinance a lending facility.

Even with a historically low base rate of 0.5% lenders have seen an opportunity to increase their margins by increasing interest rates on agreements due for renewal due to the lack of competition in the market.
During 2012 the European Parliament may well rule that banks continue to build their reserves, further than the existing Basel III regulations, which have already reduced the pool of money a lender can offer to its customers.

Positive news is that in the second half of 2011 Legal & General, GE Capital, AIG, Jefferies International, Jordan International and Chalkhill Partners all started offering new commercial finance that wasn’t previously available.

Tom Holloway, Director, Holloway Iliffe & Mitchell said: “Many of the new lenders entering the market will only consider lending on larger developments or individual buildings that have a value of £5m or more.”

At the lower end of the market, however, a number of private commercial property investors appear to be filling the void left by the major high street banks and are offering either flexible bridging or short term loans to other property owners and investors. They will often require, however a legal charge on the property and much higher interest rates than traditional lenders to reflect the increased risk and lack of alternative finance being available. As these investors are not FSA registered often they will enter a joint venture agreement as they are not permitted to provide finance products.