Government intervention and assistance from local authorities may be necessary to kickstart any recovery in the regional commercial property market, delegates at the unveiling of a key report were told.

Speaking at the Birmingham launch of the De Montfort UK Commercial Property Lending Market survey, William Maunder Taylor of Kingfisher Property Finance, said: “Some imaginative thinking and innovation is going to be required.”

The Investment Property Forum meeting, hosted by law firm Cobbetts and introduced by IPF board member David Smith, heard that lending institutions including banks, were taking a very hardline stance and proving reluctant to lend outside the south east and against a very tough checklist of criteria.

And to cap it all, the property market was suffering the double whammy of the highest arrangement fees ever demanded by banks.

Presenting the report, Bill Maxted of De Montfort University said: “Average loan to values (LTV) have fallen from a peak of 83 per cent to around 65 per cent, and while new lending actually increased in 2011, the biggest worry is the amount of senior debt maturing in 2012 and subsequent years.”

Around half of the total £212.3 billion outstanding balance sheet debt secured against UK property remains at unrefinanceable levels, above 70 per cent loan to values.

Refinancing of this swathe of debt requires the unlikely combination of a turnaround in domestic economic prospects to support real estate cash flows and fresh equity to enable loan refinancings.

According to the 14th De Montfort UK Commercial Property Lending Market survey last year saw an easing in the pace of aggregate bank de-leveraging, with outstanding UK property debt falling by 6.8 per cent to £212.3 billion in 2011, compared to 9.9 per cent in 2010.

This outstanding total, back below 2007 levels, includes £106.2 billion at LTVs above 70 per cent, comprised of £42.5 billion above 100 per cent LTV, £29.7 billion above 85 per cent LTV, and £33.9 billion above 70 per cent LTV.

Mr Maxted said: “There were £48.3 billion of UK property loans in distress at the end of last year, reflecting 23 per cent of the total outstanding debt against the sector, including £22.8 billion in breach of financial covenants and a further £19.6 billion in default.”

Secondary properties are increasingly suffering from weakening cash flows due to tenant defaults, tenant departures on break clauses or lease expiries, as well as renewals at lower rents. These are contributing to declines in capital values and causing borrowers to be unable to make interest payments, triggering loan defaults.

With traditional lenders decreasing the LTVs on which they will refinance matured loans, ranging from averages of 59 per cent to 64 per cent depending on sector and quality, and the aggregate total availability of debt vastly reduced, the prospect of deepening numbers of loans in default prompting enforcement is palpable.

This year alone around £51 billion worth of UK property loans are due to mature, while over the next five years that rises three-fold to £153 billion - almost three-quarters of the total outstanding balance sheet debt.

Mr Maxted added: “But the £212.3 billion balance sheet total is not the entire picture.

“In addition the research identified another £19 billion of debt held by mainly overseas lenders. There is around £42 billion in outstanding commercial mortgage-backed securities loans (CMBS), estimated by Fitch Ratings, and £21.5 billion in UK property loans held by Ireland’s NAMA, taking the estimated aggregate outstanding balance of real estate debt to £299 billion.

Gross property lending – comprising new loans and refinancings – was estimated at £37.7 billion for last year, up on circa £35 billion in 2010, but down on the circa £43 billion in 2009. Last year, however, saw the third successive rise in new lending and fall in refinancings, compared with the prior two years in which the segregated figures have been collated.

The rise in new lending is clearly a positive for the market, albeit modest relative to the long road ahead, and still significantly below the profligate mid noughties when annual gross UK property lending nudged above £80 billion in 2006 and 2007.

Approximately 58 per cent of the £27.5 billion of new lending completed during 2011 was undertaken by just six lenders, while 74 per cent of all loan originations last year was undertaken by 12 lenders.

Around £2.6 billion worth of debt was syndicated last year, while there was £4.3 billion worth of club participation deals. The combined £6.9 billion is a huge increase on the less than £1 billion in 2010. There was one £285 million European CMBS last year.

Senior debt margins spiked last year as well - driven by banks’ own rising funding costs - with 83 per cent of lenders that responded to De Montfort’s survey admitting that its pricing had increased in the second half of last year, after the eurozone debt crisis worsened.

Banks’ cost of capital has risen to the highest level ever experienced, survey respondents consistently reported, which has implications for internal capital allocations, potentially restricting the ability to lend against the capital-intensive real estate sector.

Average interest rate margins have tripled in the last five years to the end of 2011. For example, margins on prime office property has risen from sub 100 basis points at the end of 2006 to 300.1 bps at the end of 2011, while secondary properties have risen from 120 bps to 335 bps over the same five-year period.

In the last three years to the end of 2011, prime office margins have increased from 219.7 bps to 300.1 bps, including a 70 bps hike over last year. Similarly for secondary offices, average margins increased from 254.0 bps in 2009 to 267.5 bps in 2010, rising again by 68.7 bps to 336.2 bps at the end of last year. The pattern is consistent from prime to secondary across industrial and retail properties. Average margins for mezzanine finance provided by traditional lending organisations, capped on average between 75 per cent and 78 per cent LTV, was ten per cent.

Mr Maxted, author of the report, said: “Despite the highest interest rate margins and lowest loan-to-value ratios recorded by this research, future lending intentions remain weak. It is not believed that organisations entering or re-entering the market, although a good sign, will have the desire to direct their lending to anything other than prime or good secondary stock.

“Thus the volume of legacy debt will take time to erode. It is important that the UK base rate remains low as it has been commented that this is the key to the survival of many of the historic loans.”

Lenders also warned that the regulatory environment is making commercial property lending more difficult, particularly for banks who are dealing with the European Banking Authority’s Core Tier 1.9 per cent capital adequacy requirements and the Financial Services Authority’s intention to introduce the “slotting” regime, a risk-weighting for income-producing real estate loans under the Capital Requirements Directive.

Slotting, which is only relevant to secured lending which relies on the performance of the security, could deliver the unintended consequences of increasing margins, reducing debt as well as depressing underlying real estate values, according to the De Montfort survey respondents.

Mr Maxted said: “The unanimous opinion expressed was that, taken together with other current and anticipated regulatory pressures and given the risks associated with lending secured by commercial property, the approach to slotting as understood at year-end 2011 would increase the risk weighting of loans and require more capital to be allocated to loans secured by commercial property. Therefore it would be inevitable that the pricing of these loans would have to increase.

“Allied to this, because bank capital is a finite and costly resource, the ability of organisations to lend into the market, will be reduced. A reduction in the supply of available debt is also likely to increase pricing as well. In particular it is believed that lending will be directed to the prime market at the expense of the remaining market sectors, exacerbating the market polarisation that already exists between prime and ‘other’ commercial property.

“As such the capital values of prime property may not be adversely affected. In contrast, it is believed that the capital values of secondary and tertiary property will decline further.”