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CFI: News Review


Commercial market in 2011 - a game of two halves


by Rob Lankey, head of lending, Aldermore Commercial Mortgages


2010 has been a game of two halves as far as the com- mercial property market is concerned. Signs of recov- ery earlier in the year, when letting activity for business property started to pick up, has been replaced by a downturn in tenant demand and a deterioration in the outlook for rents. the royal institution of


chartered Surveyors said surveyors had reported that commercial property lettings activity for the third quarter this year had eased (for the second consecutive quarter). they said uncertainty over the now confirmed public sector spending cuts had made firms cautious about investment decisions and the sentiment towards office let- tings was also negative. ricS also confirmed that occupier demand for retail and indus- trial property fell at the same pace as in the second quarter this year.


Demand With demand for commercial property falling, the availabil- ity of commercial space for occupation continued to in- crease, with surveyors report- ing the biggest increase in the midlands and north, whilst availability in London and the south broadly stabilised. Savills also confirmed that


commercial property devel- opment activity contracted in September, for the second month in a row. the decline


in public sector activity was the sharpest since december 2008, whereas the decline in private sector activity was more modest. Savills say that their commercial Property development activity index, which monitors the overall performance of the uK com- mercial property sector, was -13.8% in September, down from -13.3% in august. they also confirmed that commer- cial developers remain pessi- mistic about their future busi- ness prospects for the quarter ahead (particularly the out- look for office development), citing public sector spend- ing cuts and lack of available credit as the main reasons for their pessimism.


Outstanding loans this downturn in optimism will be unwelcome news to the big banks who lent re- cord amounts on commercial property during the boom years prior to the onset of the credit crunch. outstand- ing loans on uK commercial property currently total £225 billion, with HBoS, rBS and the irish banks accounting for £185 billion between them. it is believed that the uK com- mercial property sector could be in negative equity to the tune of £120 billion. this helps explain why


the big banks are so nervous about lending on commer- cial property. at the moment many will only lend on prime property with a maximum loan-to-value ratio of no more than 50% - 60%. any- thing which falls outside this tight spec is declined, even if the proposal is submitted by long-standing and perfectly creditworthy customers.


36 mortgage introducer DECEMBER 2010 at aldermore we often


receive perfectly acceptable commercial mortgage ap- plications which have been declined by the big banks for no obvious reasons. For example, we recently ap- proved an application from a borrower who wanted to purchase a plot of land to expand his business activi- ties, but his application had been declined by one of the big banks which has recently been bailed-out by the gov- ernment. the applicant’s business was debt-free, had a solid 42-year trading record and enjoyed a trouble-free relationship with its bank throughout that period. it is understandable that owners of small and medium sized businesses are confused and angry when they discover that their bank is unwilling to support their businesses.


Finance it is small and medium-sized businesses seeking modest loans which are suffering the consequences and are now struggling to finance the fur- ther expansion of their busi- nesses. this comes at a time when the government has decided to implement deep public sector spending cuts and is looking to the private sector to take up the slack and help the economy back on the road to recovery. Small and medium sized businesses are a key component to economic success but at the moment, we appear to be asking them to fight hard with one hand tied behind their backs. Let’s hope that the new coalition government comes good on its promise to support small businesses.


if commercial property


continues to languish in the doldrums, the buy-to-let mar- ket provides more reasons for optimism. the lack of consumer confidence which has kept the house purchase market at a low ebb, has given rise to a surge in demand for rented accommodation and cuts to public sector hous- ing budgets will only act to strengthen demand for good quality rented housing. com- pared to the same period last year, the volume of buy-to-let lending is up by 14% and the value of loans has increased by 33% according to the cmL. michael coogan, cmL


director general said: “We would expect buy-to-let de- mand to pick up further [in 2011] if current rising rental trends continue and house prices remain broadly stable. However, there is short-term uncertainty as a result of the unresolved debate on hous- ing benefit and landlords’ re- sponse to new limits. “the bigger question is


whether there will be suffi- cient supply capacity to meet that demand, as the number of buy-to-let lenders dwin- dled in the credit crunch af- ter 2007 and is yet to be fully restored. He added: “However, it is


clear that in a market where access to home-ownership has become more difficult, the private rental sector is ex- periencing, and will continue to benefit from, high levels of demand for good quality housing.” 2011 is not going to be a


walk in the park, but if we can see a steady increase in eco- nomic activity, that will be a worthwhile result.


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