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Loans on commercial property in UK decline set to continue in 2009

De Montfort University's Commercial Property Lending Review, broadly seen as a key study of UK commercial mortgage markets, indicates a sharp contraction in the number of active lenders.

The report, which covers a £226.7 billion total commercial and social housing property loan book, showed that just over a quarter of the 58 banks surveyed completed no loan originations in the first half of 2008, while 12 banks undertook 74% of all lending in the period.

The report also shows that appetite to lend to commercial property buyers weakened yet again by the middle of 2008 as the value of loans in breach of financial covenants hit 3.3% of the total aggregated loan book, more than treble the proportion reported at the end of 2007.

Fewer organisations intend to increase their volume of loans in 2009, with just 38% replying that they will compared with 55% in 2007.

The average loan book allocation for commercial property fell to 9.5% in June 2008, a 1.5% point fall on the year-end 2007 figure. This figure could fall even further as the recession amplifies a commercial property correction and a squeeze on inter-bank lending persists, the report suggests.

'A weakening economy resulting in the failure of an increasing number of business tenants and further declines in capital values will make it far more difficult for lending organisations to maintain or refinance existing loan portfolios,' the report says.

'It is expected that liquidity will remain scarce and may have even been further eroded by the events in the banking industry subsequent to mid-year 2008,' it adds.

On top of this 43% of organisations reported having put loans into administration during the first half of 2008, compared with 33% of banks who were forced to do so during the whole of 2007.