European lenders are hitting the brakes again on speculative property developments due to fresh market jitters and concerns about Basel II, a report by EC Harris concludes. Nearly half of property lenders at European banks are likely to either lend less or maintain the same level of lending over the next five years, the study found. By comparison, last year only 3% stated they would lend less, and 29% said they would lend at the same level.

Office and retail development projects in tier one cities such as London, Frankfurt and Paris are lenders’ most preferred asset types while PPP and student accommodation projects have dropped in popularity as public sector spending falls away. Tier two cities including Poznan and Wroclaw in Poland and Lyon and Lille in France are also attracting increased volumes of lending to retail projects. Only 6% of lenders said they preferred PPP projects and just 3% preferred student accommodation, down from 15% (PPP) and 11% (student accommodation) last year.

Nearly all (97%) of respondents stated that they were more likely to lend to projects that were pre-let, rather than speculative as these guaranteed cash flow. Almost half (48%) of lenders had a preference to lend to projects with equity joint venture partners in the form of investment funds as these bring control and governance to a project. Many lenders, particularly those in Western European banks, also predicted growth of alternative sources of finance such as mezzanine (28%) and corporate or project bonds (22%).

Matthew Cutts, Head of Lenders and Investors at EC Harris said: 'We are seeing a crisis of confidence amongst the European banks at the moment. Very few are lending speculatively and this is leaving many projects unable to get off the ground. Lenders are waiting until the eurozone situation improves, but with this likely to take some time, lenders and developers need to work together to find new ways of convincing credit committees to accept manageable project risk.'

More than two thirds (63%) of those surveyed also said that they preferred to lend to their home market rather than abroad. Among the reasons given for this were stronger relationships with developers and a greater understanding of that market.

There was also concern that the requirement to hold a greater amount of reserve contained within the Basel III accord is having a detrimental affect on lending. While investors understand the need to remove ‘bad’ assets from their books, this is proving difficult in the tough economic climate, the report said.