Lending to UK commercial property has recovered in the second quarter, turning around three consecutive months of net losses at the beginning of the year, according to the latest Bank of England figures.
While Q1 ended with net lending at -£330m in March, it rose to a positive £680m by May – the most active month since last summer – before coming back down to a relatively flat -£11m in June.
Despite a small fall at the end of Q2, UK banks have generally increased their property activity since the beginning of 2016.
The £11m fall in net lending was muted compared to the five-year June average of -£933m.
There was not a single month of net growth in lending to property between the end of 2011 and the start of 2016. Since then, there have been 12 months of positive activity.
However, that does not mean UK banks have lost their caution over the industry, with the stock of outstanding property loans still standing at a 16-year low of 7.1% of all stock.
Following the financial crisis, nearly 12% of banks’ outstanding loan books were property loans and that has been on a constant downward trajectory since then.
But despite some industry fears that development finance is drying up, the stock of development loans has risen by about £400m in the past year as cautious banks have restarted some of their activity.
Comment, Eduardo Gorab, UK property economist, Capital Economics
Traditional lenders are still willing to extend credit to riskier development activity.
In fact, in the 12 months to June, the stock of loans secured against buildings that have yet to be completed has risen by £442m.
Meanwhile, the equivalent figure for existing buildings has fallen by just over £1bn.
The Bank of England data is not without its limitations.
Crucially, it only covers banks and building societies. The limited data available suggests that alternative lenders – like insurers, sovereign wealth funds and debt funds – have been more active in the property segment over the past few years. As a result, the BoE data paints an incomplete picture.
But even then, lending volumes only tell us part of the story.
The pricing of loans points to a degree of caution. Laxfield Capital’s most recent survey highlighted that average LTVs dipped from 58.8% in Q3 2016 to 57.5% in Q1 2017.
And more recently, anecdotal evidence suggests lenders have become a little more reticent to extend credit, citing higher risks as the main reason, rather than increased borrowing costs.
Looking ahead, there is little reason to think the market is about to change direction.
For one thing, with GDP growth soft and the MPC sending some mixed messages, borrowing costs are unlikely to move too much in the short term.
Moreover, barring a souring in investor sentiment, investment activity should hold up well, particularly with yields in most property segments 20bps-30bps higher than at this time last year.
As such, lending to commercial property is likely to track sideways over the second half of the year.
To send feedback, e-mail karl.tomusk@egi.co.uk or tweet @ktomusk or @estatesgazette
