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Commercial property debt falls to lowest point since 2005, says influential DMU report

Outstanding commercial property debt is on course to fall to a 10-year low during 2015, declining by one per cent in the first half of 2015 to £163.7bn, according to academics at De Montfort University Leicester (DMU).

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However, strong levels of new loans in 2015 mean that the total amount outstanding may actually increase for the first time since the recession.

The half-year edition of the De Montfort Commercial Property Lending Report, the most comprehensive study of the UK’s commercial property lending market, concludes that the continuous decline in total real estate debt since 2008 “appears to have almost halted and may subsequently be reversed by year-end”.

The value of new loans started in the first half of 2015 was £24.7bn. This was the highest half year value reported to the research since £49.2bn recorded for the first half of 2007.

In a further sign of commercial property market health, the value of distressed loans - those which are defaulted or with bankrupt companies - fell from £23.2bn at year-end 2014 to £15.7bn at mid-year 2015.

The report is written by Bill Maxted, consultant and senior lecturer at Leicester Business School, in the Faculty of Business and Law, and Trudi Porter, a former lecturer at DMU. The report - compiled from data supplied by the leading banks, building societies and lenders - are used by the Bank of England in its twice-yearly Financial Stability Review.

It found that there was more appetite among non-traditional lenders to finance speculative or partly pre-let projects.  Following a surge in non-traditional lenders in 2014, Banks and Building Societies remained the dominant lenders in the market, holding 76% of all loan originations at half-year 2015, compared to 75% at year-end 2014. The level of new lending by UK Banks and Building Societies remained stable at 39% of all loan originations.

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Ion Fletcher, director of policy (finance) at the British Property Federation, said: “We seem to have reached a turning point in the amount of commercial property debt in the market, with the impact of post-crisis deleveraging almost totally cancelled out by new lending. While this suggests things are ‘hotting up’, a stabilising of senior debt margins and broadly level LTV ratios indicates lenders remain risk-conscious.

“We are also encouraged to see increased lending to speculative commercial property development projects. These are crucial if we want SMEs to have room to grow their businesses.”

Posted on Friday 18th December 2015

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