UK prospects are good but high debt levels a risk

OverseasProperty Lenders with a heavy exposure in property-related borrowings risk suffering a "hangover" from the property party.

There is £150 billion (€217 billion) in property debt in the UK and this represents a considerable risk, says the head of valuation at Savills, William Newsom.

He was speaking in Dublin yesterday and warned that, in Britain at least, if not in Ireland, the current lending environment - where growth of total debt has outpaced the rise in the Investment Property Databank's All Property Capital Growth Index by 2.5 times since 1997 - was "unsustainable".

Savills recently acquired Dublin agent Hamilton Osborne King for €50 million.

Newsom provided a similar message at his annual financing property presentation in the UK. "There is around £150 billion of outstanding property debt in the UK today," he said. "Not only are banks lending more than ever before, they are lending at greater risk and with reduced returns," he stated.

Higher levels of competition meant there are "too many banks chasing too few lending opportunities".

The outstanding debt figure of £150 billion (€217 billion) for 2005 comes from a comprehensive annual survey of the property sector's debt by De Montfort University.

It showed that lending to commercial property soared by 16 per cent in Britain last year.

"The golden era of property lending is drawing to a close," Newsom stated.

"It is more difficult to hide mistakes in a low-margin, high-risk lending environment and even more challenging for banks to sustain historic levels of business in an increasingly competitive market."

The increased competition has forced banks to increase exposure to higher risk residential property lending over the past 12 months, Newsom believes.

Average exposures have risen from 14.6 per cent to 17.2 per cent.

He also suggests, however, that the prospects for property investment over the next few years remain very strong.

"We may be entering the final few hours of the 'property party' but no one has knocked on the door yet to invite us to turn the music down," he said. "The macro-economy appears robust and the continuing weight of capital would suggest that yields are likely to harden until 2008/09."

Optimism was also on hand from Savills' head of residential research, Jim Ward.

He said: "On the whole, house prices look sustainable, but in development there is a need to create new concepts rather than bottom shelf pricing, to decrease risk in those markets where high housing supply is concentrated," Ward stated.