The full effect of the credit crisis was exposed by the dwindling number of banks looking to grow their commercial property loan books

The study of bank lending to the commercial property industry shows that while the amount lent continued to rise in 2007, nearly 400 loans slipped into default, up from fewer than 80 in 2006.

Although the combined value of the loans - at £250m - is relatively small, it suggests that a growing number of smaller property investors and developers are failing due to the current financial crisis.

Surprisingly, the number of commercial property loans that are in breach of financial covenants, but not yet in default, improved over the year. Loan breaches reduced from 1,900 to 1,050, suggesting banks are working harder to resolve debt problems before they move to default.

KPMG real estate partner Michael Lindsay said: "There are covenant breaches and then there is the more serious area of non-payment.

"I think that to date banks have been fairly pragmatic as long as clients are meeting interest payments. Whether that continues we will have to see."

However with £34bn, or 17pc, of total outstanding debt due to be repaid this year, there is a growing concern that banks are starting to take a far tougher stance.

Angus McIntosh, head of research for property agent King Sturge, said: "Banks are starting to get a little nervous. They are going back to valuers and asking them to reassess market values. They are starting to worry about defaults. If there is a slowdown they need to know what they will acquire by default."

The report by De Montfort University goes on to show that during 2007 growth in lending to the commercial property market slowed dramatically from 19.5pc to 3pc.

Loan securitisations also fell sharply, from £18.2bn in 2006 to £7.9bn last year, leaving banks saddled with up to £11bn of debt they could not sell into the securitisation market.

The full effect of the credit crisis was exposed by the dwindling number of banks looking to grow their commercial property loan books. The 90pc of lenders looking to grow the loan books at the end of 2006 shrank to 55pc at the end of 2007. The report concludes just £45bn of new business could be written this year, a 46pc reduction on 2007.

Mr Lindsay said: "I don't think many banks are saying they are closed but in practice I don't think the level of appetite is high among many institutions, although there are exceptions, banks such as Lloyds and Abbey [which] are seeing the situation as an opportunity to gain market share."

The report covers 60 institutions representing over 90pc of the commercial property debt market.