Most UK property lenders unable to shrink loan books

* Savills sees 50 mln stg property debt in negative equity

* Predicts 75 pct of UK investment loans in LTV breach

* Sees lenders saddled with existing loans for 5-10 yrs

By Daryl Loo

LONDON, June 3 (Reuters) - Most lenders to Britain's investment property market will be unable to shrink troublesome loan books for the foreseeable future, despite much of this debt being under water, property services firm Savills said.

At its annual property financing presentation on Wednesday, Savills (SVS.L) estimated 50 billion pounds ($83 billion) out of 280 million pounds of loans arranged in the market's 2004 to 2007 boom, are now worth more than the underlying properties.

"My guess is that at least 75 percent of all loans are in breach of at least the LTV (loan to value) covenant," William Newsom, Savills UK head of valuation, said.

Half of existing lenders also plan to decrease their loans to the sector this year, according to Savills.

So foreclosing on the debts of property owners may not be an option because the lack of financing makes it difficult to find new buyers. Banks are also reluctant to sell into a falling market.

As an alternative to calling in the debt, most lenders are extending repayment periods, in some cases by as much as eight years, while renegotiating loan terms at higher margins, Newsom said.

"Banks are the new property owners, in partnership with their borrowers ... the next 5 to 10 years for banks will be about managing existing loan books," he said.

Of 22 banks willing to originate loans of above 10 million pounds in value, 10 are German lenders, while eight are from the UK, including Barclays (BARC.L), Lloyds Banking Group (LLOY.L) and HSBC (HSBA.L), according to Savills' survey of bankers. Just two banks, DG Hyp and Eurohypo (NHYGga.H), both German, are willing to make loans of above 100 million pounds each on their own, the survey showed.

Mat Oakley, head of commercial property research at Savills, expects UK investment sales for the first six months of 2009 to be higher than in the second half of last year, and reckoned this signals the property market has turned the corner.

While buyers have so far concentrated on top-end buildings with long leases and strong tenants, he expects to see a new wave of risk-loving investors, keen to take advantage of the massive discounts currently available.

"We will start to see the opportunistic deals coming in, and the best deals will be done before the herd returns in 2010, 2011," he said.

For a related analysis, click on [ID:nLT433017] (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)