The frozen property financing market shows some signs of thawing although the deals are smaller and the main players are German banks looking for better-priced opportunities. Lynn Strongin Dodds reports

A flurry of recent surveys has shown that there is a slight easing in the property financing market in the UK. However, it is far too early to crack open the champagne. Institutions are not only charging higher margins for the privilege, but are also more discerning and seemingly only interested in small, bite-size pieces of prime real estate.

William Newsom, head of valuation at property adviser Savills UK, says: "Certain major banks will take a very long time to come back into the market and anyone who imagines otherwise is wrong. It is important to take a historical view. At the end of the 1980s, Barclays had the biggest exposure to property and it took the bank the best part of 10 years to get back into lending after the property crash in the early 1990s.

"Although currently many of the large banks are out of the market due to their exposure to toxic activities, and swathes of the property market such as secondary investment properties and development projects are unfinanceable because of perceived insecure cash flows, there are opportunities for those lenders with liquidity. They will be able to generate good returns from lending secured against good quality assets."

According to a survey by Savills, which interviewed more than 100 global lenders, German banks such as Helaba, Deka Bank, WestImmo, Landesbank Berlin, Munich Hyp, Deutsche Postbank, LBBW and D G Hyp, are the main contenders in the UK property market. They accounted for eight positions on the list of 12 that were looking at big ticket deals which are now classified as being in the £25m-plus (more than €27.8m) range. In 2007, the figure was £100m-plus. Other interested parties included Société Générale, The Bank of London and the Middle East, Abbey and Nationwide Building Society. British stalwarts such as the Royal Bank of Scotland and HBOS have effectively shut up shop.

Newsom comments: "It is not a surprise that the German banks are the main players. They are classically counter-cyclical and many withdrew from the markets during 2005, 2006 and 2007 when the UK property market was at its peak. They did not want to excessively compete but they have returned as prices in the UK have corrected more than in other countries in Europe."

Barry Osilaja, European director at Jones Lang LaSalle corporate finance, echoes these sentiments. He notes that the total amount outstanding to the UK property market on an annualised basis during the peak years of 2004 to 2007 was around £30bn. Of this, the commercial mortgage-backed securities (CMBS) market accounted for an average of 30%, the balance sheet and syndicated lenders comprised about 60% and the annuity lenders 10%.

As of today, "the CMBS market has shut down while a large chunk of the balance sheet lenders are still trying to rectify their business. What we are seeing, though, is that the German banks are coming back to the UK, now that the Pfandbrief market has begun to thaw out," he adds.

Pfandbriefe, which are bonds issued to refinance mortgage and public-sector loans, suffered in the wake of the collapse of Lehman Brothers and mortgage woes at German banks such as Hypo Real Estate. At the end of the fourth quarter in 2008 issuance in general slowed, while there was a virtual standstill in benchmark jumbo Pfandbriefe, which have €1bn minimums. Since the beginning of this year, though, activity across the spectrum has resumed.

A recent study by broker and consultant Cushman & Wakefield also revealed that German banks featured prominently in the UK, although it did not mention any specific names. Overall, the study found that 49 of the 83 largest European banks it canvassed were effectively closed for business, while 12 were only lending to their established client base. Of the 22 lenders who were open to new clients, half preferred deals involving lot sizes of less than £20m, with the rest only willing to finance deals of as much as £50m.

The report showed that loan-to-value (LTV) ratios had dropped from 80-85% before the credit crunch to the current 60-70%. The fall was more pronounced in western Europe where LTVs slid from 85-90% to 50-60%. Ed Daubeney, partner in Cushman & Wakefield's corporate finance team, says: "The sweet spot for lending today is between £20m to £40m in terms of loan size. Banks have also tightened their criteria. They want a proven track record, prime assets, long-term leases and income, strong borrowers, as well as covenants."

Newsom adds that there is also "a new definition of prime. At the height of the market, everything was labelled as ‘prime'. Today, banks are looking for properties with much smaller lot sizes - up to £30m compared with £100m-plus at the peak - that are well located and let to good quality tenants on long term leases. There is no shortage of lenders - and buyers - when an opportunity like that comes to the market.

"What we are not seeing at the moment is a rush of forced sales as no one wants to sell at the low point of the cycle. If possible, vendors would rather sit on their hands, waiting for a recovery. As a result, we are seeing less than 25% of the volumes of last year."

Osilaja notes, though, that the ice is beginning to melt slowly on the transaction front. "There are some players on the continent who left and are now beginning to take another look at the UK because the yields have fallen 4.5% from the peak to just over 7.5% today. The continent has not been as aggressive and if you factor in the currency exchange the UK looks quite attractive. In the past month, there have been a few good transactions in the City."

The deals in March included the acquisition of Governor's House in the City of London by German pension fund BVK from New Star Asset Management for around £70.3m, reflecting a yield of 7.25% as well as French group AEW Europe's purchase of City Place House for £67m from PRUPIM on a yield of 9.75%.