Lending to property continues to fall

Commenting on the Bank’s findings, Jones Lang LaSalle said that the drop in new lending to the sector was down to liquidity problems in the banking sector, the legacy of the property slump and rising debt costs.

In spite of the fall, banks’ attempts to reduce their exposure to commercial property continue to be slow. UK bank exposure to real estate, i.e. the proportion of lending to real estate as % of total lending, remained static at 9% compared to Q1 2011. At £189bn total lending outstanding to real estate was 23% down in Q2 2011 from the peak of £244bn in June 2010, although borrowing decreased less than 1% from the total amount outstanding in the previous quarter. Whilst a proportion of the large drop in Q1 2011 can be attributed to the way in which the Bank of England compiles its statistics, credit markets have been extremely volatile over the quarter due to uncertainty in the Eurozone and an increasingly fragile banking sector, which has impacted on credit availability. 

Barry Osilaja, director of corporate finance at Jones Lang LaSalle said: “Bank de-leveraging still has a long way to go; whilst loans have been repaid in net over the quarter, the debt mountain and banks’ exposure to the real estate market continues to loom large for lenders.”

“Future lending for the rest of the year is expected to remain constrained, even if interest rates are held at their current low level” adds Jeremy Handley, director of valuation advisory. “However, some German lenders, including Pfandbrief issuers and local banks are still lending for core assets with good covenants. The quality of the property and cashflow are still key for lenders with very few banks prepared to take on secondary risk. We are also seeing an increase in the amount of loan book sales, which a number of banks are using as a way to reduce exposure. Should this prove to be successful, this could have a positive effect on lending in the coming year. ”