Irish banks have cut-back on their lending to developers for speculative commercial property schemes because of fears of overheating in the property market generally. The principal lenders to the property industry have been under pressure from the Central Bank, which has expressed its fears over the high level of lending to the industry and the threat to the banking system in the event of an economic downturn.

The developers immediately affected are those involved in speculative office and industrial schemes and newcomers to the business who do not have an established track record. The banks have also increased their margins on loans for development purposes in a further bid to cool the market.

Bank borrowings for commercial property have risen dramatically over the past two years. In May, 1998, borrowings stood at £2.4 billion but they have since increased by 46 per cent to £3.5 billion. Developers involved in office schemes in Dublin city centre, including the docklands, are not likely to be affected because space is already in short supply in these areas and unlikely to increase significantly for at least two years.

However, the banks are clearly concerned about out-of-town speculative schemes unless they have already been pre-let. In one area alone - Sandyford - more than three million sq ft of office space is either under construction or planned over the next five years.

The cut-backs are likely to be welcomed by major developers, such as Treasury Holdings, because it will reduce the threat of an oversupply of office space at a time when it is building 1.75 million sq ft at Central Park in Leopardstown and planning to embark on another scheme of 500,000 sq ft at the former Allegro site in Sandyford.

John Bruder, associate director at AIB Investment Managers, was not surprised by the intervention of the banks because the volume of speculative developments planned would undoubtedly have swamped the market. He said it was good to see the market was now regulating itself, with funding only available for the high quality schemes and for developments which would be pre-let. These measures would moderate development and ensure that the market wouldn't rush towards oversupply. Mr Bruder said it seemed most forms of speculative schemes were now more difficult to fund mainly because of concern about the out-of-town developments. "I suspect a lot of the banks are probably looking at their overall exposure in the property sector. I would imagine most of them have been doing a lot of lending in the property sector over the last few years."

John Moran, director of the investment department at Jones Lang LaSalle, said the banks had widened their margins in response to perceived greater risks and had become more selective in their lending policies for development projects. "They are shying away from speculative schemes and tending to lend only to developers with track records. They are also seeking greater equity inputs from borrowers or recourse to more assets as security for loans."

He said a number of institutions had taken up some of the slack resulting from the tighter credit.

Killian O'Higgins, managing director of DTZ Sherry FitzGerald, said the banks faced significant exposure because of high site values and building costs. With all the local authorities now permitting more offices, there were more developers in the market and it was easier to get permission for office schemes than heretofore.