Lending to commercial property (May.) - Capital Economics
UK Commercial Property

Lending to commercial property (May.)

UK Commercial Property Data Response

The notable rise in net lending in May was probably due to lenders allowing for payment holidays rather than an increase in new loans to investors. But, these measures can only continue in the short-term and we expect transaction activity will be weak this year, which will keep a lid on net lending to property.

Lending likely to turn negative in the coming months

  • The notable rise in net lending in May was probably due to lenders allowing for payment holidays rather than an increase in new loans to investors. But, these measures can only continue in the short-term and we expect transaction activity will be weak this year, which will keep a lid on net lending to property.
  • Net property lending by banks and building societies saw a sharp increase in May, rising by £3bn compared to minus £0.7bn in April. (See Table 1.) The strength of May’s data was driven by a notable rise in lending for standing investments, which rose by £2.7bn, compared to minus £0.7bn in April. We think this was probably because some investors agreed further payment holidays with their lenders, reducing the amount of repayments made in May. Meanwhile, as developments restarted and developers were probably seeking bridging loans, borrowing for development increased by £0.3bn. (See Chart 1)
  • Outstanding debt to property as a share of total lending was at its highest level since May 2014 as it edged up to 7% from 6.8% in April, but this remains relatively low by historic standards. This suggests that even if there is a rise in write-offs, the impact on the banking sector would be limited.
  • On balance, we expect net lending to commercial property will turn negative in the near term. An increase in the risk of defaults will probably limit the willingness of banks to lend. Indeed, we saw Intu unable to agree a package with creditors and enter administration last week and this highlighted the vulnerabilities of some landlords. (See our Update.) Further, a drop in the volume of transaction activity and the value of assets being transacted will reduce the demand for new lending.

Chart 1: Net Lending to Property by Banks and Building Societies (£Bn, 3m Rolling Total)

Table 1: Lending to Commercial Property – Key Figures

 

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Outstanding debt to property(£bn)

158.1

157.9

158.9

159.5

160.0

162.7

162.9

163.1

162.9

167.7

166.8

169.9

– to standing property(£bn)

143.9

143.1

144.0

145.1

145.4

148.0

148.6

148.7

148.5

152.4

151.5

154.4

– to development (£bn)

14.3

14.8

14.9

14.4

14.6

14.8

14.4

14.4

14.4

15.3

15.3

15.5

Net lending to property (£m)

1300

93

950

1229

445

357

34

125

199

4795

-733

3005

– to standing property(£m)

1049

-460

872

1714

404

238

307

73

197

3918

-735

2686

– to development (£m)

251

553

78

-485

41

119

-273

52

2

877

2

319

Property as a % of outstanding debt

6.9

6.8

6.8

6.8

6.8

6.9

6.9

6.9

6.8

6.9

6.8

7.0

Source: Bank of England


Prohad Khan, Property Economist, prohad.khan@capitaleconomics.com