Speculative property development in the UK has seized up amid rapidly worsening credit conditions,

Speculative property development in the UK has seized up amid rapidly worsening credit conditions, according to industry insiders.
The launch next week by Assetz, the property investment group, of a fund to bail out builders struggling to raise debt finance is being seen as the latest sign of deteriorating conditions, which have worsened even in the past fortnight
The fund will aim to close the gap - normally between 10 to 15 per cent - between the developer's fixed level of equity and the diminishing level of bank finance. It will come at a price - in this case, between 50 and 65 per cent of the profit from the development, in addition to 15 per cent annual interest on the initial loan. But Stuart Law, chief executive of Assetz, said: "This is not greedy. I've not had a developer bat an eyelid yet."
The appetite for cash even at this level of premium underlines just how desperate the situation has become for many developers. The health of the debt markets is key to the property sector, both commercial and residential, since developers and investors both rely on high levels of borrowing.
Certain companies are halting speculative development in the commercial sector, while the residential market is also being affected, particularly in the unlisted sector.
A finance director of a large unlisted commercial property developer, who asked not to be named, told the Financial Times that he had been trying, but failing, to secure debt to carry out the next phase of a scheme in London.
A leading real estate banker added: "There is no market at all for speculative development funding. You need a letting, a track record and your own equity, otherwise you might as well not bother."
Further testament to the sector's difficulties - and the speed with which conditions have deteriorated - came from a developer of high-end London residential buildings. In the past fortnight alone, he said, the market for development finance had frozen up as banks retreat from further bad news, which meant they did not wish to risk further exposure to residential property.
Assetz is not the only fund seeking to take advantage of the situation. Jones Lang LaSalle Corporate Finance, for example, is working on a scheme that would buy residential development land from distressed house builders to move it off their balance sheets.
"I've seen the market tighten over the past three months to the point that development finance has all but dried up," said Tony Edgley, international director for Jones Lang LaSalle Corporate Finance, who added that basic construction finance was still available but from a limited number of banks and at reduced levels.
Up to last summer, gearing of above 80 per cent was common but now borrowers for both development and investment say the average loan-to-value ratio has been tightened for smaller deals and withdrawn completely for larger ones.
The problems are mostly in the unlisted sector, as quoted companies tend to have large undrawn debt facilities. But the Financial Times understands that listed developers, too, are in the market for finance to build large commercial schemes. The difference is that they are not broadcasting the fact.
"The majority of listed companies have got pretty good balance sheets this time," said John Burns, chief executive of Derwent London, who pointed to its own £370m of undrawn bank facilities. "But its 100 per cent correct to say that if facilities aren't in place then loans for speculative development won't be available."