Volatility returns to property financing, say Savills

Published 16th Jun 2010

Volatility has returned to the property financing market as Greece’s debt crisis, instability in the Eurozone and a new coalition government have prompted a “clear change in sentiment”, Savills said on Wednesday.

William Newsom, Savills head of valuation, warned an audience in the City of London that there was a “greater sense of nervousness” over the last six weeks following the €750bn bailout of Greece, adding that concerns over the direction of inflation and interest rates had also created new areas of uncertainty.

Newsom predicted that overall lending levels would remain depressed for two years and that the £15.1bn of new lending to UK property undertaken during 2009 – which was a ten year low – would be repeated this year and next as lenders ambitions for new debt issuance remains “weak”.

Further constraints on the availability of new money would be placed on banks by Basel II and Basel III regulations, Savills argued. Newsom said the rules – which will increase the amount of capital a bank must set aside against distressed loans - were a “huge issue for property banking”.

New lenders had entered the market but were not yet a powerful force, he said. Newcomers that had already undertaken loans included Aldermore, Bank of China, Royal Bank of Canada, Standard Bank, M&G, BSI and Unity Bank.

Newsom added that there had been six lenders in the development finance arena for prime residential or fully pre-let commercial schemes; Barclays/Barclays Wealth, Close Property Finance, Investec, HSBC/HSBC Private Bank, Lloyds Banking Group, RBS/Nat West/Coutts. He said that 10 other lenders may provide finance ‘in the right circumstances’.

The cost of unwinding interest rate swaps – which are set at a fixed rate for a period of time - was preventing banks releasing a flood of property onto the market, Newsom said. Savills estimates that the total cost of unwinding existing swaps could be as much as £10bn.

He added: “Interest rate swaps are a perfectly proper risk management tool and 92% of banks continue to insist on it. In fact it usually points to stability in the market because the rate of interest payable is known for a period to come. However, before the credit crunch, nobody anticipated the rate at which interest rates fell.”

Source: ' PropertyWeek '

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