Commercial expects further debt issues

David French

January 19, 2008

According to its survey, two-thirds of commercial banks expected the credit crunch to have a worsening effect on the sector.

Some banks have already tightened their lending criteria with higher interest rates being charged.

As commercial loans are largely financed by debt with equity financing 10 per cent of finance for new purchases, much of the recent demand has been dependent on the banks’ ability to lend but with money not available, lenders have been forced to tighten criteria to restrict applications.

Banks are also demanding that investors finance more of the purchase price with their own equity, as loan-to-value ratios have dropped to around 75 per cent – a reduction of around 8 per cent.

Tim Crossley Smith, head of valuation at GVA Grimley, said: “Despite the recent reduction in the UK Base Rate and three-month LIBOR returning closer to ‘pre-crunch’ levels, there appears to be a high degree of uncertainty over how the overall situation will change over the next three months, although looking at the survey, it would appear lenders believe conditions will get a bit worse before they begin to improve.”

Nick Reeves, head of commercial at The Business Mortgage Company, said: “The expected expansion rate is similar to the rate reported in the previous six months, which suggests that the credit crisis has had little impact on the confidence of those investing in commercial property. This positive outlook indicates that the commercial market should continue to perform well in 2008.”

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