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Lending to UK property businesses is set to increase by 25 per cent during 2012 as new debt providers move in to fill the financing gap left by the banks, according to a new report.
In its annual report into the property financing market, Savills, the property services company, said loans issued against offices, shops and industrial buildings would hit £35bn this year, compared with £27.5bn in 2011.
The expected increase comes as a spate of new entrants try to get a foothold in real-estate lending.
Insurers, asset managers, and specialist debt funds have stepped up lending to the sector during the past six months as pressure grows on banks to rein in their exposure to property.
As well as many banks being over-exposed to property – a legacy of profligate lending in the run-up to the financial crisis – regulatory changes are set to increase the cost of holding debt secured on buildings. New regulations being pushed by the Financial Services Authority, known as slotting, are expected to increase the risk-weighting of loans secured by commercial property, forcing banks to allocate more capital to them.
William Newsom, Savills UK head of valuation, said the shifting regulation was likely to be the catalyst for the biggest structural change in property lending of the past 20 years.
“The issue of banks having to raise more capital to support existing loan books is affecting their lending ability. However, slotting is likely to increase the sale of loan books, which will have a positive impact on the property market. It will also accelerate the resolution of legacy issues in the banks,” Mr Newsom added.
Savills identified that a third of the lenders to the sector which have the capacity to issue and hold loans of £100m or above are insurers. Of the five insurers now active in the property financing market, including Legal & General, M&G and AIG, only Aviva was present prior to 2008.
Insurance companies were historically an important source of finance to the property sector. Many were squeezed out during the 1980s, however, as banks became more aggressive in the way they priced property loans.
The upshot was that many banks were left overexposed to the sector when the market collapsed in 2007, forcing them into heavy writedowns on billions of euros worth of non-performing loans.
Savills said it expected sales of banks’ existing loan books to double during 2012 to £8bn.