Development finance available for new UK commercial properties has continued to dry up, with fully pre-let and speculative projects falling out of favour with major lenders who have been spooked by the euro zone debt crisis, a survey showed.

Lending organisations commented that the existing liquidity crisis had been made more acute by the problems of European sovereign debt and the unknown extent of contagion between banks, De Montfort University's Bill Maxted, co-author of the survey, said on Friday.

The De Montfort survey is closely watched by property market insiders for its access to leading lenders and for its resultant insights into the health of sector finance, a critical driver behind big-ticket investment and development.

In its mid-year property lending report, De Montfort said the number of lenders willing to fund fully pre-let developments fell to 31 percent at end-June from 52 percent six months earlier. Those willing to lend against speculative development fell to 15 percent from 17 percent, the survey said.

The UK commercial property market has been depressed by the global financial crisis, with heavily dented values still edging back. Finance available for new-build projects, direct investment and refinancing existing debt remains scarce.

The pipeline of UK development projects has been curtailed by the country's bleak economic outlook, while tepid sentiment among tenants in key business hubs, such as London's City financial district, has led to demand for new space tapering off.

PARED BACK

Great Portland Estates said in November it was not likely to secure a major letting to kick-start its planned 100 Bishopsgate skyscraper in the City for between six and 12 months.

By contrast, Land Securities said it would speculatively build its Walkie Talkie tower, also in the City, though Chief Executive Francis Salway noted: We fear demand and rental growth will remain muted for the foreseeable future.

Around the UK, risk-wary mall developers have pared back their plans, especially for projects that had negligible pre-lets, citing funding availability, economic headwinds and lacklustre consumer confidence.

Maxted said respondents had suggested only improved confidence in the UK economy, demonstrated by a number of quarters of sustained growth in UK GDP, would signal a recovery in the commercial property market.

The survey also said the value of outstanding on-balance sheet debt among lenders fell to 201.3 billion pounds at end-June, from 208.4 billion six months before. About half of this, or between 85 billion and 14 billion, could not be refinanced in current market conditions.

These figures underline how critically important it is for government to use all of the tools at its disposal to help tackle this overhanging property debt, said Liz Peace, chief executive of the British Property Federation.

(Editing by David Holmes)