There are signs that life is returning to the lending market, but banks are imposing tough lending criteria and buyers will need to be in a strong cash position to succeed. Lynn Strongin Dodds reports

After a long extended fallow period, the property lending market is beginning to see signs of life. Banks are starting to return to the fray although caution remains the watchword. Terms and conditions continue to be stringent and only prime properties with long leases are on lenders' radar screens.

Ed Daubeney, partner of corporate finance at Cushman Wakefield, notes: "We are beginning to see a trickle of lenders return to the market but they are all targeting investment grade assets with leases of over 10 years. However, cash buyers still have the advantage over those bidding for a property with debt."

Simon Redman, head of product development of Invesco, adds: "There is a bit of a thaw but it depends on what type of property you are buying. If buyers have cash and only need a bit of debt then it will not be difficult to get financing for core assets. However, it will not be that easy if they cannot afford it. The main lenders continue to be the Germans but they have strict terms and tend only to lend at up to 50% to 55% loan to value level (LTV)."

Bill Hackney, chief operating officer of Cordea Savills, adds: "Things are improving a little and it is clear that there are more banks that are willing to lend compared to a year ago. We are also seeing lower margins, but an increased incidence of bolts on such as commitment fees, which banks now appear to want to charge on both drawn and undrawn elements of a facility."

Paul Stevens, head of structured property finance at Investec Specialist Private Bank, believes: "There is a two-tier market developing between the primary and secondary markets. There is a fair amount of competition in the first but it is harder to get funding for the second because of poorer quality tenants as well short dated leases. Banks are also averse to financing development deals because of high levels of existing development stock on their books. We are seeing a reasonable volume of good quality of development deals at present and I would argue that now is a better time to get involved in these deals because the ‘in' prices are generally lower than two to three years ago."

Savills, which took the temperature of the UK market in October, revealed there are currently 23 lenders in the £20m (€22m) plus category. The UK, along with France and Germany, has seen the most activity, although transaction levels are way down from the boom years. The study, which examined the database of over 100 lenders, noted that there were 63 deals in the £20-50m range, while 26 were recorded for the £50-100m range. Only five assets traded at above £200m, with four having debt attaching to them.

Breaking down the players, German banks such as Deka Bank- Deutsche Pfandbriefbank, Deutsche Postbank, DG Hyp, Eurohypo, Helaba, DG Hyp, Helaba, Landesbank Baden-Wurttemberg, Landesbank Berlin, Munich Hyp and Westdeutsche Immobilienbank featured prominently. Other participants included Aviva, Barclays, HSBC, ING Real Estate Finance, Investec, Lloyds Banking Group, Nationwide Building Society and Santander.

Jones Lang LaSalle, which in November issued its report ‘Lenders Expectations', confirmed these trends. It sent 30 detailed questionnaires and interviewed seven key banks in the UK during September and October 2009. Barry Osilaja, director, structured debt and equity solutions at Jones Lang LaSalle, says: "Before the financial crisis, RBS and HBOS together accounted for 50% of balance sheet lending to the commercial property market. Today the market is dominated by German banks, where many use the Pfandbrief (a type of bond issued by German mortgage banks that is collateralised by long-term assets used). For a large deal we will see the large German banks such as EuroHypo but we will also see Barclays and Abbey. For deals in the £50-75M range, Deutsche Postbank, Deutsche Pfandbriefbank and Deka are the most active. Smaller transactions will include Investec, the Co-op and Alliance & Leicester."

According to the Jones Lang LaSalle's report, 35% of the banks are prepared to lend between £25m and £50m with 30% in the £50-£100m bracket. Currently 16% fall in the £10-25m range, and 12% over £100m. Loan terms are typically three to five years, with almost 50% of lenders offering a five-year term. The most cautious players are structuring 15-20 year loans and are seeking significant amortisation of senior debt over ten years.

The Jones Lang LaSalle report also showed that there is more competitive pressure on margins than loan to values which currently sit between 50% and 70%. Credit committees are unlikely to loosen their grip in 2010, although respondents in the survey expect to see an easing in 2011. About 37% expect to see LTVs of between 70% and 80% although no one believes they will climb to over 80% before 2012.

The picture is brighter for margins. Currently, they are around 220 bps for prime properties although this disguises the wide range of margins between 170 bps and 300 bps. They are predicted to drop to an average of 167 bps (ranging between 100 bps and 250 bps). Some lenders indicate an improving attitude to risk - predominantly in terms of lease length and where there was a compelling investment story - but this will come at a cost of 300 bps.

There is also hope on the syndicated deal front. The Jones Lang LaSalle study found that almost 60% believe over £100m of debt is currently achievable with 80% expecting over £100m to be possible by 2011. Many lenders canvassed expressed frustration that in some cases participants claimed to be willing to lend at the start of the process but pulled out at the last minute. "They found easy excuses not to proceed. This was happening well into the purchase process and created huge difficulties in progressing deals while replacement lenders were found," said the report.

Steve Willingham, head of debt capital Europe at MGPA, a private equity real estate investment advisory company, says: "What we are seeing in club deals is that banks are willing to take a larger share of the financing. For example, six months ago, there would be about four banks involved in a €100-200m club deal, but now appetite has extended to allow a two bank group to be formed for such an underwriting. They are still cautious though and will only lend on a narrow range of prime properties."

Some industry participants are less hopeful about the future. Isabelle Scemama, head of commercial real estate loans for AXA Real Estate Investment Management, says: "I am not that optimistic looking ahead because in 2001 the traditional players - the UK and German banks - will have to deal with the bad loan exposures that they took on in 2005 until 2007. They are numerous and will be impossible to refinance and this will have an impact on the lending market."