Banks Continue To Be Ultra Cautious And Refuse To Sanction Lending For Commercial Property. Why?

A new Government project called Project Merlin, which was designed to increase commercial lending to new businesses, seems to be working according to figures from January 2011. The new regime is set to help smaller businesses obtain commercial mortgages to buy their own premises.

The crash that began in 2008 saw a huge drop in property values, but some new statistics show signs that commercial property values are on the rise. But it seemed clear in the last quarter of 2010 that the market was not going to recover very quickly, as banks were still holding back on commercial mortgages leaving many small businesses unable to buy business premises.

Statistics have shown the commercial property purchases levelled off and did not increase much at all at the end of last year. The same statistics showed that UK businesses have no funding in order to allow them to purchase their own commercial premises in the latter part of 2010.

But in the first quarter of 2011, commercial property prices have increased, which went against the anticipated market trend which was expected to continue to fall. This is welcome news to businesses, the public and the Government and is a sign that things are healing, and the commercial property market is now on its way to recovery.

The statistic released also showed that almost 5% of surveyors had seen an increase in supply of commercial property so far this year. The news came after one of the country's largest estate agents confirmed just after the new year, that there were limited commercial properties available in London which caused commercial property prices to stay high.

The picture for London, inevitably, is not the same as the rest of the country, with regional patterns of growth and recovery. Knight Frank has claimed that this was because "regional variations are becoming increasingly visible with the picture on rents and capital values broadly reflecting the emerging economic recovery".

Even though the right market conditions for business to expand seem to be present, it is still exceedingly difficult for companies who want commercial mortgages to get them. A report from commercial property advisor CBRE says a third of the lenders previously active in the commercial mortgage sector have pulled out since 2007, leaving a huge lending shortfall.

It has been confirmed that 69% of lenders who offer commercial mortgages have withdrawn many of their commercial mortgage contracts and products. Many other lenders have withdrawn from the commercial market altogether, meaning that there are less places to go to obtain the funding required if you are in search of a commercial mortgage contract.

The Government's most recent initiative, Project Merlin, was hoped to ensure that banks increased commercial mortgage lending to small businesses. The target for lending in the UK was raised from GBP66 billion in 2009 to GBP76 billion in 2011. However, with fewer lenders active in the commercial mortgage market, this target could be difficult to reach.

This situation seems a bit of a 'watch this space' one, as it could go either way. It is still early in the year so the next few weeks will hopefully tell a clearer story.