Debt secured against UK commercial property fell from more than £300bn to about £293bn in 2010 as lenders rebuilt their balance sheets and began to repair the damage inflicted by excessive lending during the property boom.
The influential UK Commercial Property Lending Market survey by De Montfort University, published today, found that two thirds of lenders (67%) reported a decline in the value of their outstanding loan books in 2010 - the first recorded fall in the report's history.
Lenders' debts held on balance sheet fell from £228.3bn at year-end 2009 to £206.9bn at year-end 2010, a reduction of 9.4%. This included about £10bn of debt that was transferred to Ireland's National Asset Management Agency.
Respondents reported that £45.9bn of loans were due for repayment in 2011 - down from £55bn in 2010.
Report author Bill Maxted said:
"There has been a measured reduction in outstanding debt that has, so far, avoided off-loading property assets to the detriment of the market and capital values.
"The rate of increase in impaired loans appears to be slowing and new loan originations are cautious in nature and based on conservative terms. These actions could be regarded as important first stepping stones on the path to recovery."
However, the report made clear that conditions for both lenders and the property industry remained extremely challenging. Just £19.9bn of new loans (not including short term extensions to maturing loans) were made in 2010, up from £15.5bn in 2009 but totalling less than half of the debt that will need to be repaid this year.
In addition, UK lenders were found to be heavily exposed to non-prime property, accounting for 69% of debt compared with just 45% among their German counterparts. Maxted explained that "great uncertainty" continued to shroud the non-prime market due to the "continued weakness of the UK economy and the still difficult-to-quantify impact of the UK Government's austerity measures".
Lending on commercial development hit an all-time low, with the share of total property loans, accounting for just 4.75% of loan books, compared with 11% in 2007.
And the cost of borrowing hit its highest ever recorded level in 2010, with average interest rate margins predicted to remain flat or climb further in 2011 by 98% of respondents.
Liz Peace, chief executive of the British Property Federation, said:
"While there is certainly a glimmer of hope in these figures, the outlook for the commercial property industry and the banking sector remains extremely challenging.
"We would urge Government to recognise that while there may be light at the end of the tunnel, this is a fragile recovery, and our industry remains extremely sensitive to further shocks that may be caused by ill-judged interventions from policy makers."
