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Bank Lending to UK Property Market Hits Post-Lehman Low

Dominic Burke | Photographer's Choice | Getty Images

Bank lending to Britain's property market is at its tightest since the collapse of U.S. investment bank Lehman Brothers, a report showed on Friday.

Though lending has picked up since Lehman collapsed in 2008, the protracted euro zone debt crisis and shaky domestic economic data has hit confidence among banks, making them more wary of offering new loans to property companies.

The proportion of banks planning to increase lending on property was 42 percent at June 30, down from 57 percent in 2010 and 44 percent in 2011, a study from Leicester-based De Montfort University showed.

This was lowest since Lehman's collapse at the end of 2008, when the figure tumbled to 23 percent from about 90 percent in the preceding boom years.

UK banks lent tens of billions of pounds to property in the years before the real estate-induced global financial crash, much of which was for shops and offices outside London, where values have fallen sharply.

(Read more: BoE Warns UK Banks May Lack Enough Capital)

Given the tougher capital adequacy rules of Basel III, the sluggish economy and banks' need to shed bad loans, they face some of the harshest conditions in the report's 15-year history, said Bill Maxted, co-author of the study, which interviewed 74 lending teams.

"I talked to people who have been in banking since the early 1970s and they say they've never seen a situation like this," Maxted told Reuters. "They've said to me this time, 'we just don't see a way out of this one'."

Smaller Developers Hit

The dearth of financing has hit smaller developers and landlords harder than larger property companies such as British Land and Capital Shopping Centres, which have been able to raise finance from the bond markets.

"While the big boys will be able to access debt from alternative providers, the rest of the market has to compete for an ever-decreasing slice of the pie," said Liz Peace, chief executive of the British Property Federation lobby group.

Other lenders, such as insurance companies, are stepping in to fill the void, but they are unwilling to lend where banks now fear to tread and their focus tends to be at the so-called prime end of the market.

The banks' retreat has strengthened the hand of cash-rich sovereign wealth funds that have bought a string of properties in European cities such as Paris and London, viewing them as a safe place to park cash. Notable purchases this year include the 400 million pounds ($645 million) spent by a Malaysian consortium on Battersea Power Station in London.

(Read more: BOE's King Warns of Growing Currency Competition)

Banks such as RBS and Lloyds are making slow progress in selling loans secured against commercial property, hampered by steep falls in values that would mean selling at a loss. Outstanding debt fell 4.3 percent in the first half of 2012 to 204.1 billion pounds, the survey showed.

"The banking system is constipated with property loans," said Michael Marx, chief executive of Development Securities. "Five years into this crash, and property as a percentage of banks' total loan books has gone from 12 percent to 10 percent, which is higher than before the 1991 crash."

"At this rate it will take another decade to return to normal - and I'm not sure there is much anyone can do about it."

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