With the roller-coaster days for speculators now well and truly over, institutions lending to the commercial property market have adopted a much more cautious approach to funding both new and existing properties.
One of the consequences of this is that the margin on the funds they lend has widened.
Most institutions are now giving the thumbs down to applications for loans on properties with no planning permission. "Banks are not prepared to take that risk," one banker told The Irish Times, as he pointed to the widening over-supply position in the Dublin office market.
The spate of domestic IT closures, combined with the shaky international environment, have taken their toll. The negative sentiment has led to a number of property funds cutting their encashment values as they try to halt withdrawals. And the latest Exchequer returns showing the surplus running £1 billion (€1.27 billion) under budget will support the more cautious approach being adopted by lending institutions.
There has been a gradual drift up in the margin that banks take. It now varies between 1.5 per cent and around 3 per cent above the cost of funds based on Euribor. The 3 month rate being quoted at around 4.25 per cent is now equating to a lending rate of over 6 per cent in most cases. With a further cut in interest rates likely to be announced by the European Central Bank, most borrowers seem to be steering away from fixed rates.
"There has been a distinct cooling off in lending to the commercial market," said Mr Jerry Burke, head of property at Bank of Ireland's corporate banking section. The "market has fallen back" as there are "not too many buyers in the market". There will have to be an adjustment, he added, which will make the market "subdued for a while". However, he stressed, it is "not all doom and gloom". His bank's property lending is continuing to expand, because of the bank's emphasis on quality lending. And this trend should continue, he added.
Asked about an eventual contraction in his lending portfolio once the loans start to mature, he said he did not think this would happen. And he noted that the underlying market is far healthier than in previous times of retrenchment as individuals and corporation are now much more liquid.
Mr Peter Butler, Anglo Irish Bank's head of banking in Ireland, is cautiously optimistic with a projection that his property loan book will continue to show growth this year, but at a lower rate than in 2000. He is also worried about the large overhang of office space in Dublin with more coming on stream. He sees a period when landlords will have to give free rent periods with some rents coming back. His exposure to offices is "very small" but he would be concerned about dot.com and IT companies.
With what he claimed was his bank's "very conservative" approach to lending, he has done no speculative lending for over a year. Loans on developments have contracted but there has been growth in lending to all the other areas, including investment properties and retail. And while he was apprehensive about the hotel industry four months ago because of the foot-and-mouth scare, that sector has "rolled back quite well". Anglo's average margin on lending, he said, has remained static at 2.1 per cent.
AIB, however, said margins on lending for office development had widened. "Any time a sector is not in vogue, an increase in costs is inevitable" together with bigger fees, according to an AIB spokesman. However, he noted the increase has not been big-at most it would have been about up to a quarter of a percentage point. The actual rate, he said, depends on the customer's standing and the degree of pre-let. The average margin, he said, would be 2 to 3 percentage points over the cost of funds. The bank is continuing to finance pre-let or substantially pre-let developments.
Ulster Bank said it still has plenty of deals in the pipeline but conceded there is "some softening" in the market and the bank is more cautious. "What happens in the next six months will be crucial," Mr Michael Feeney, director of business and corporate banking, said. The bank does lend on speculative investment for its own customers-these have to stand up to the usual loan criteria.
The latest lending statistics to real estate show a 4.5 per cent rise from £7.7 billion (€9.8 billion) on December 29th, 2000, to £8.0 billion (€10.2 billion) on March 30th, 2001. This represents a considerable slowing on the 7 per cent growth rate in the previous quarter.
These latest figures do not reflect the more negative sentiment since April. While the next figures may not show a decline, they are likely to confirm a continued contraction in the growth rate. Still, lending to real estate remains far larger than the lending to the whole manufacturing sector which experienced a fall from £5.7 billion (€7.2 billion) on December 29th to £5.4 billion (€6.9 billion) on March 30th, 2001.
