Property lending “to remain muted”
While concerns about the economic outlook, public-sector spending cuts and constrained consumer spending all have a part to play in the negative sentiment currently making the headlines, worries about the financing of property are also still having an impact.
The recent figures from the Bank of England show that bank lending to property in Q2 2010 dropped by £3.5bn after a slight improvement in the first quarter. Jones Lang LaSalle points out that this is the largest fall in a single quarter since the data series began in 1987. However, JLL says the statistics do not necessarily reflect banks’ reluctance to lend for property investment. “Bank debt is still available for property investors purchasing prime assets at sensible loan to value,” it comments. Instead, it says the figures show that banks are starting to deal with the problem loans on their balance sheets.
Barry Osilaja, director in JLL’s corporate finance team, said that if banks were indeed resolving their problems, in the medium to long term this would be positive news for UK real estate. However, in the short term, the market for lending was likely to remain restricted to prime assets, and overall net lending might continue to shrink, he added.
Cushman & Wakefield recently commented that while overall credit conditions have eased marginally, as shown by the Bank of England surveys, the flow of funds to business remains restricted. It has become slightly easier to obtain debt on commercial property, it says, with more lenders willing to lend as capital values have recovered and rents have stabilised. “Overall availability of affordable debt is however still less than the market needs and what is available is still focused on prime property, with lenders still very reluctant to finance more secondary investments where income security may be an issue,” the group notes. As a result, lending for 2010 looks set to remain muted, Cushman & Wakefield says.
There is a large amount of institutional money chasing investment deals, which has restricted the opportunities for banks to lend at reasonable levels, the group notes. In addition, much of the lending that has taken place this year has been for refinancing and restructuring.
In a recent commentary, the Telegraph noted: “The road ahead could be a slow one for those looking to invest, as banks are likely to take their time readjusting their balance sheets before being willing to back property schemes with loans. In the 1990s, according to figures from the Bank of England, it took from March 1991 to December 1997 for banks to reduce their exposure to property lending from its peak level to a low. This decade the corresponding peak was reached in July 2009. A return to boom times is obviously some way off,” the paper concludes.
