The Financial Services Authority’s crackdown on its oversight of commercial property lending by banks spells further problems for the industry.
The City regulator this week ordered banks to improve the way their internal models measure risk or switch to more standardised calculations.
The move, which is part of a global effort to prevent banks from understating risks on their balance sheets to boost their capital positions, is expected to lead to banks increasing the costs of loans and further restricting lending targets.
The FSA reportedly started its review with commercial property lending because it was seen to be one of the areas that was central to the financial crisis.
It comes as the sector already suffers from a shortage of financing, as banks scale back lending targets to shore up their balance sheets.
But while the news is worrying for the industry, it could lead to further growth in opportunities for alternative funding sources.
Richard James, chief financial officer at Cordea Savills, said: “Standardising risk models will worsen the debt financing trend that is already happening, making banks become more selective, while increasing costs for investors.
“It provides an opportunity for other capital-based debt products which can provide senior debt through to higher-placed B-notes all the way through to mezzanine debt.”
He said a specialism could emerge for institutional capital that can move quickly to “close out an emergency process”, plugging the gap as banks scale back leverage levels on specific deals.
In recent months, a number of alternative institutions, such as insurance firms AIG and Legal & General, have taken steps to set up a property lending platform, while a raft of debt vehicles have also been launched.
bridget.o’connell@estatesgazette.com
