Controversial plans to redevelop Smithfield Market, the centre of London’s meat trade for hundreds of years, into a new office block, could become a casualty of the credit crunch.

Five years in the making, the ambitious proposals to build a statement office building on the market’s site could finally be abandoned as Bank of Scotland Corporate, a backer of the project, undergoes retrenchment in its lending to commercial property.

Property experts believe that Thornfield, the developer behind the project, which is 50 per cent owned by Bank of Scotland, part of the troubled HBOS group, will be loath to spend millions of pounds appealing against a Secretary of State decision to block the project, although the company is still saying that it will make revised proposals.

Even the project’s supporters in the Corporation of London, which is bringing forward the proposals with Thornfield, are concerned that the wider problems at HBOS, combined with the slump in commercial property values, will put paid to the scheme.

Peter Rees, the corporation’s head of planning, last week told a planning committee that the viability of any scheme on the site had taken a hammering, and that “Smithfield could go on the back burner, given the current climate”.

The Smithfield project is one of many Bank of Scotland commercial property investments that may be jeopardised by the bank’s problems and its proposed merger with Lloyds TSB.

Property industry sources are concerned about what Lloyds TSB will do with some of HBOS’s bigger investments, assuming a merger proceeds.

The property industry has already seen Bank of Scotland almost cease new lending to developers. Now it is braced for the bank to take a tough line with developers and companies, forcing developers that have breached their loan-to-value covenants into distressed sales.

Peter Damesick, of CB Richard Ellis, the surveying firm, said that the next few months might see Bank of Scotland and its compatriot bank, Royal Bank of Scotland, monitor property loans and investments very closely and try to sell many more assets. Mr Damesick said: “The Scottish banks have been very significant in lending to the industry. We may now see them become important in terms of supplying property — either through distressed sales or asset management — that equity buyers will go for.

“There are major changes going on at the \ banks — changes of management and corporate status — that will inevitably lead to a change in approach, that may see their attitude to commercial property harden.”

For the past five years, Bank of Scotland Corporate has been one of the biggest lenders to the commercial property world, with about £47 billion of its £117 billion loan book and equity holdings in property, but whether it can maintain its track record after merging with Lloyds TSB is in doubt.

HBOS’s bullish reputation is in direct contrast to that of Lloyds TSB, which is seen in the market as a conservative lender — although it is thought that it wanted to increase its exposure to the commercial property sector.

Bank of Scotland Corporate’s commercial property team, led by Peter Cummings and John Moran, is keeping quiet while uncertainty over a merger of HBOS and Lloyds TSB continues. After a merger, the new business would have 15 to 20 per cent of the commercial property market.

However, the property industry has already seen Bank of Scotland pull back from some investments, such as the GuestInvest buy-to-let hotel room business, and it believes that this is only the beginning.

A spokesman for HBOS said: “HBOS remains committed to the commercial sector and maintaining our position within the market. We continue to support our customers in this sector.”

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