Net lending to UK commercial property reverses sharply in April

Let lending to by banks and building societies to the UK commercial property sector fell back dramatically in April, to -£33 million, compared to £1.46 billion the previous month, according to official Bank of England figures, in a reversal swayed by prolonged uncertainty property yields creeping upwards.

Capital Economics explained that this fall was unsurprising given that the strength of net lending in March did not seem consistent with an environment of uncertainty and weakness in property investment activity. The property forecasters and economists said they expect net lending to be subdued this year.

Amy Wood, Property Economist, at Capital Economics explains:

“The main driver was a decline in net lending for development. Indeed, after increasing for the past three months, net lending for development fell by almost £350m. This weakness, however, is consistent with the Q1 RICS survey which suggested that surveyors are reporting falling development starts in both the office and retail sectors, although they continue to report rises in industrial development.

“Nevertheless, although dominated by the March increase, net lending to property has improved this year. This is in contrast to net lending to all sectors of the economy, which has totalled just £11bn over the past three months compared to over £33bn in the last quarter of 2018. However, we do not expect net lending to continue to improve.

“Admittedly, with the extension to the Brexit deadline, the prospect of interest rate increases has been pushed back until late next year which could encourage some investors to borrow. But economic growth is expected to tread water which will limit rental value growth. Further, given yields have started rising, particularly in the retail sector, we think that concerns about property values will hold back lending.”

In the first quarter, net lending totalled £1.4bn, compared to just £300m in the same period last year. The rise in net lending was substantially driven by net lending for standing property, but net development lending was also positive. These results are consistent with the Q1 Bank of England Credit Conditions survey, according to Capital Economics, which suggested that the balance on the availability of credit improved in the first quarter, albeit it remained slightly negative.

Amy Wood, Property Economist, at Capital Economics, added:

“Although the increase in net lending is encouraging, the bigger picture is that it remained subdued compared to history.  The latest Cass Business School UK Commercial Real Estate Lending Report showed that the pricing of loans secured on prime retail property increased by around 20bps to 233bps over 2018, while pricing increased by almost 50bps to 334bps for secondary retail.

“Admittedly, the Q1 Bank of England Credit Conditions survey suggested that pricing concerns eased a bit at the start of the year. But with valuations in many commercial property sectors looking stretched, we think that pricing will continue to limit borrowing.”

james.wallace@realassetmedia.com