Commercial property loans has risen by 400 percentage

report published today, which covers 60 institutions representing more than 90% of the commercial property debt market, reveals that the number of commercial property loans in default has risen by 400% in just 12 months.

Although the £250m combined value of the loans in default is relatively small, it suggests that a growing number of smaller property investors and developers are failing due to the current financial crisis.

Nearly 400 loans slipped into default, up from fewer than 80 in 2006. The report, from De Montfort University, also shows that lending to the commercial property market slowed from 19.5% to 3%.

Average loan-to-value ratios for almost all sectors were the lowest recorded, and all organisations increased arrangement fees substantially, reaching their highest levels by the end of 2007. Since then, most investors report that conditions have not improved for borrowers.

According to the survey, bank lending to the property sector reached record levels in 2007 before the market tightened as the credit crisis ended years of easily accessed finance.

Debt rose to a record £247bn in 2007, from £215bn in 2006, with approximately £200bn standing on the balance sheets of the lending banks.

This figure rose by 16% last year, partly owing to an estimated £11bn of debt remaining on banks’ balance sheets that was intended to be securitised but then could not be distributed following the freeze on this market last summer.

The defaults result from covenant breaches and non-payments. Industry analysts consider that, up to now, banks have been fairly pragmatic as long as clients are meeting interest payments, but this situation may not continue.

Banks are beginning to get worried and are asking valuers to reassess market values. They will need to know what can be acquired by default if there is a slowdown.

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