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European banks show appetite for lending

KUALA LUMPUR: European banks are showing appetite for lending against well-let prime assets with established borrowers although situations do not seem very good for new businesses.

According to a survey of 83 of the largest European banks conducted by Cushman & Wakefield, 59% of these banks are effectively closed for lending to such companies, and the same fate goes to lending against commercial real estate.

“The credit crunch has significantly reduced the availability of debt financing for property transactions and some banks which are over-exposed to the property market have effectively withdrawn from writing new business.” said Ed Daubeney, partner in Cushman & Wakefield’s corporate finance team based in London on April 1.

Daubeney added the balance sheet lenders that are still lending to the market now have far stricter loan criteria and are demanding higher margins with lower loan to value ratios.

In the survey, of the 22 banks  lending to new clients, many have caveats regarding how much they would lend and to whom. Of these 22 lenders, half of them preferred deals involving lot sizes of less than £20 million while the rest are able to finance deals as much as £50 million.

In addition to the decline in the number of lenders, loan-to-value ratios have also fallen. In the UK, for example, ratios are 60% to 70% as compared to 80 to 85% before the economic downturn. In Western Europe the ratios stand at 50 to 60%, from 85 to 90%.

However, there are still pockets of capital available for the right deals and banks will now focus on lending to experienced borrowers on prime properties let to investment grade covenants on long leases in Western Europe and other core markets, Daubeney said.

“We consider there will be up to 15 lenders still who are actively lending to new clients without many pre-conditions- there is a distinct "flight to quality" in the current debt market and you can still arrange funding for experienced borrowers for prime assets with long leases let to investment grade covenants,” says Daubeney.

The lack of lending against commercial property has led to a huge fall in the volume of completed deals. Global investment in commercial property dropped 59% in 2008 to US$435 billion from 2007’s record of US$1,050 billion. 

“This was the lowest annual total since 2004 with a significant decline in investment from foreign investors,” said Daubeney citing figures from Cushman & Wakefield’s Investment Atlas 2009 published in 1Q2009.  The report also predicted volumes will fall again this year to around US$412 billion.

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