BANK lending for speculative commercial development projects soared by more than 40 per cent last year, according to research from De Montfort University.

The university’s annual commercial bank lending survey shows that banks have rapidly stepped up their exposure to speculative development finance, from virtually nothing five years ago to £5 billion at the end of 2005.

Lending to speculative commercial developments, where no business tenants have been lined up in advance to rent the building, is regarded as risky. In the early 1990s, excessive bank lending to speculative projects came unstuck when the economy crashed and developers could not repay their loans.

Notwithstanding the large rise over the past five years, speculative lending is still at low levels — £5 billion represents only 3 per cent of the total value of outstanding debt secured on commercial property.

Nevertheless, the rapid increase in lending to these projects is beginning to cause concern among some property analysts, who fear that banks should be more careful not to repeat past mistakes.

Lending to the commercial property industry as a whole soared last year at its fastest pace since the survey began in 1997. Banks increased their gross annual lending by 47 per cent to £62.4 billion. The research estimates that the value of outstanding debt to the commercial property sector at the end of December 2005 was £156.6 billion.

In theory, the true figure is even higher because this number does not include loans that banks have taken off their balance sheets through securitisations.

Between 2000 and 2005 the research recorded £31 billion of securitisations. In 2005 alone £12.6 billion was securitised, by far the highest level recorded in a single year.

Much of the bank lending to the commercial property industry is against so-called investment properties — leased to tenants that pay rent, often on long-term secure leases.

But fierce competition among lenders is forcing many banks to lend more money at lower margins on riskier properties — whether they be development projects, secondary quality buildings, or more unusual types of buildings.

Lending to the commercial property sector in the past three years has taken place against a backdrop of soaring property values, boosted by strong demand from investors to buy assets in the sector.

But many industry experts believe that values have peaked and some secondary quality properties could even fall in price over the next few years. Some analysts believe that this means lenders need to be more careful about the terms of loans.

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