Lenders taking cautious stance as market loses some heat

Bank of Scotland's entry into the State's residential mortgage market through the establishment of a tele-banking network has sent shivers through the industry - but it is expected to have few repercussions for the commercial mortgage sector. Instead, there is a note of caution based on the feeling that the boom has peaked. Dr Jim Power, economist with Bank of Ireland, said that as in the residential market, there was a trend emerging on the commercial side of a levelling off of prices.

"The market has been extremely hot. It is starting to lose some of the heat. I just sense that the sort of ball-headed enthusiasm for commercial property has started to abate in the past couple of months."

Commercial mortgages, used for purchasing, constructing or refurbishing business premises, have, however, grown in tandem with their residential counterparts, and have almost doubled in four years, from £1.4 billion in 1994 to £2.7 billion in 1998. They amount to 15 per cent of the total mortgage market of £18.6 billion. Although the size of the loans involved, ranging from £250,000 to millions of pounds, means they are not as susceptible to tele-banking as the smaller scale residential loans, Bank of Scotland's ownership of Equity Bank means it already has a physical presence in the Republic through which it operates a commercial portfolio.

Kevin Beary, head of banking at Equity Bank, said it is building its commercial presence on behalf of Bank of Scotland. "Bank of Scotland has given Equity Bank a mandate to develop its business banking North and South of the Border," he said. Equity's recent acquisition of Smurfit Finance for an estimated £35 million (€44.44 million) will give it extra leverage, giving it about 7.5 per cent of the small and medium-sized business leasing and commercial mortgage market.

Mr Beary said that "based on the level of pipeline business in the system", he believed there was at least another 12 months of commercial activity at current levels. But Dr Power said he expected more caution entering business transactions and bank lending practices. "I think we have passed the peak but I do not see a dramatic slowdown. We will start to see a more horizontal move in the market."

Brian Healy, division manager in property finance in EBS, said the anticipation of an end to the boom was affecting commercial lending across the industry. Borrowers were being advised to be cautious on their projections on returns. "Commercial property is a cyclical business and the banker who forgets that will be sorry. You cannot afford to be flaithiulach with it in any way," he said.

Any future interest rate rises will "put the cat among the pigeons. People need to look at the yield of what they are buying, bearing in mind that the cost of borrowing is likely to be higher".

He said there was some evidence of borrowers looking for investment opportunities in Britain, where they believe the potential is better for capital appreciation.

The EBS, a Dublin-based player in the long-term finance market, has been pushing out to the provincial towns, diversifying into pubs, hotels and offices. However, it was sticking with secure investments and warning borrowers of the perils of short-term tenancy agreements.

Mr Healy said people were being warned that with the commercial property market at its strongest, and the likelihood of borrowing costs increasing, a hard look at future cash flows needed to be taken. "People, especially at this stage in the property cycle, need to be careful with tenancy relationships," he said.

Tom Browne, director of banking, Dublin, for Anglo-Irish Bank, said that up to now, the commercial market had remained very competitive because of the number of players involved. "As a result of that, the borrowers out there are getting good deals." But he said the bank would always be careful on the merits of each loan. "We often say the loans you write today are the problem loans in five years' time."