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Our market view

2009

The Bank remains open for business and continues to offer new facilities to house builders. We still see opportunities for good developers to make money in this difficult market, but they must be able to buy land at the right price and develop an attractive product in the right location. Even in a difficult sales market, housing that is close to good schools, to locations with resilient employment prospects and to transport hubs is still in demand. Prudently, even in these areas, developers' land acquisition prices should allow them to discount their sale price to a level which will achieve a sale whilst providing them with a satisfactory margin even if, as we expect, values reduce further in 2009.

Interest in acquiring houses has not disappeared. As we turn the year the RICS recorded the fastest monthly growth in new buyer enquiries since August 2006. The long term imbalance between supply and demand of new housing has not altered. In the short term what is lacking and what has contributed to the rapid decline in residential values is the desperate shortage of mortgage finance from a U.K. banking sector struggling to recapitalise itself even with Governmental help. The mortgage provision which is still available requires significant deposits from new buyers or substantial equity in the property which buyers are selling to enable the new purchase.

2008 was the most extraordinary year any of us can remember. Who could have predicted that in 2008 Royal Bank of Scotland plc would be all but nationalised and HBOS require rescue so that over 40% of the combined Lloyds/HBOS group is owned by the U.K. taxpayer? The fear of unknown credit risk in banks which froze the interbank credit market, reduced and tightened credit provision by the banks themselves. This has lowered the value of all asset classes, including property, and consequently, reduced the value of previously adequate bank security for loans, compounding the downward spiral of credit problems.

Housing forecasts

After a slow start, the U.K. Government led the way with the announcement of a credit relief package in October 2008 but failed to follow through to revive credit provision within the U.K. economy. Only in mid January 2009 have further measures, to specifically attain this objective, been announced. These measures will take time to have an effect and economic activity will continue to reduce during the course of 2009. The U.K. Government has made it clear that it will take whatever measures are necessary to recapitalise the U.K. banks and enable them to provide credit to their customers to oil the wheels of commerce and revive activity. This resumption of activity will, over time, put a floor under all asset prices.

Given the severe shortage of mortgage credit and poor economic climate we expect continued falls, albeit at a slower pace, in residential property values, throughout 2009. The first-time buyer market has been particularly badly hit by tightening mortgage provision. Consequently one and two bedroom properties, particularly apartments, have suffered the greatest falls and will continue to do so. Family housing has fared better as some acquirers have a fund of equity to support new purchases, but the reduction in values generally has caused all discretionary buyers to hold off purchases until they perceive the market has bottomed, or until cash hungry pressurised vendors provide them with sufficiently large discounts to compensate for the risk of further value reduction after purchase.

As house builders have generally been unable to sell their product profitably in 2008, they have severely curtailed their new build activity and projected build completions are likely to be less than half 2007's. Build activity is likely to reduce further in 2009. The current over supply of unsold new build property is likely to remain until mortgage provision improves but the U.K. public still wish to own the property they live in, as evidenced by the recent increase in new enquiries. Generally we expect cash buyers, or those requiring little relative debt to asset value, to begin purchasing in 2009 and we are seeing evidence of such greater activity in our book as the New Year starts. As mortgage provision improves over the course of 2009 and 2010, so sales activity will increase and values will stabilise.

We have taken this expectation into account when offering new facilities and our loan to value ratios are lower. Nonetheless we are still lending and we are one of the few still offering facilities to developers and house builders. We have customers who have survived the market travails and we are attracting experienced new customers from other banks which are either "out of the market" or not providing credit because of capital or liquidity problems. These customers are now able to acquire sites cheaply enabling them to factor in the expected further value reductions and still anticipate a reasonable profit in the next year or so.

The massive reduction in residential mortgage finance and in commercial property term finance caused us to be prudent in the provision of our bridging facilities in 2008. Consequently our bridging volumes were well below our budget but the portfolio has performed excellently and we are pleased with the result. We are still very much open for new bridging offers but our criteria have to be more prudent than hitherto until the credit markets which refinance our short term loan facilities improve. We expect to see more opportunities to provide short term assistance as the long term refinance market improves over 2009.

A member of staff