Banks are not about to cut and run – despite the current difficulties in the commercial property market, a gathering of Midland experts has heard.
Fire sales would only precipitate a further slump, the sector was warned.
The assessment came at a meeting of the Investment Property Forum, chaired by David Smith, of Kaupthing Singer & Friedlander.
Both Mr Smith and speaker Bill Maxted, a lecturer at De Montfort University, expressed the hope that the worst could be avoided, ut there was no disguising the fact that many players are finding the going tough.
Speaking at a packed meeting at the offices of DTZ in Birmingham city centre, Mr Maxted said April and May had seen the market deteriorate “quite dramatically again”.
Things had certainly become “a lot slower”. Pundits were questioning whether the downturn would correspond to a “V”, a double dip “W” or even an “L” where it goes down and then stays flat rather than rebounding.
“We don’t want forced sales in a declining market because that would produce another decline,” said Mr Maxted.
Lenders were saying that. so long as there was an income flow. they would try to work with borrowers as much as they could.
But Mr Maxted also noted that this was a learning curve for the banks, saying one funding team had admitted not one of them had experienced a recession.
“Nobody said to me they would pack up and run,” said Mr Maxted.
“Every organisation said it would only make a bad situation worse.”
Mr Smith, head of property finance for KS&F in the Midlands, cautioned that the critical issue was cash flow.
While quite a number of borrowers might be technically in default under their funding arrangements, so long as there was a tenant in the property and rents were being paid, most banks were taking the “sensible decision” to run on the loans.
Many would have years still to go, taking them into the next cycle and better times.
Mr Maxted agreed, saying: “If there is a cash flow then the lending organisation can do something with it.
“If not, then the property will end up on the market. Then it is just a question of what sort of volumes we are talking about.”
The meeting heard there was a major question mark over lending levels tied to speculative development.
Mr Maxted said figures showed this was nowhere near the massive problem it had proved to be in the early 1990s recession. But it remained to be seen whether this would come “back to bite” some lenders.
This was coupled with an overall loan to value ratio of 50-60 per cent against a more normal 30-35 per cent for the property market as a whole, reflecting a range from funds who may be ungeared to private property companies who often have higher gearing.
Mr Smith said certain property funding teams had got into the market late and there were examples in Birmingham.
They had sought to play catch-up by backing speculative developments at low finance prices in order to gain market share.
But generally he was hopeful of avoiding problems over the issue.
He said: “The occupier market is strong. As long as that holds up then it seems manageable.
“If the occupier market goes then there could be some issues.”
Kaupthing Singer & Friedlander was still lending on speculative projects where it knew the developer and they had a track record, and dependent on the proposition’s location, product and price relative to the competition around it.
Mr Maxted stressed there continued to be some encouraging indicators.
Ninety-five per cent of lenders still regarded commercial property as an asset class against which to lend, while lower loans-to-value, increasing margins, higher arrangement fees, higher interest to income cover and lower residuals showed a much more realistic pricing of risk.
He added: “There may be a few bumps on the way but I believe we are entering a more stable and realistic market over the next five years.”