Two seemingly opposing viewpoints on property’s funding crisis emerged this week. But read between the lines and there are grounds for optimism.
In one corner is Savills’ annual financing property research, published on Tuesday morning. In that, UK head of valuation William Newsom said he expected the annual volume of new lending in the UK to rise to £50bn by 2016 – almost double last year’s total.
Contrast that with the view of the Bank of England’s Paul Tucker, who delivered the Investment Property Forum’s Alastair Ross Goobey memorial lecture that evening.
Tucker’s tone was more cautious, as you might expect from the Bank’s deputy governor for financial stability. “With the worst still possibly ahead of us rather than behind us,” he said soberly, “banks should take what opportunities they can to build their resources.”
On the face of it, the two views are incompatible. Newsom is saying that lending to property will increase substantially over the next four years; Tucker is urging banks to rebuild their balance sheets.
But you don’t have to scratch too far below the surface to see that the two arguments concur more than they clash.
Alleviating tight credit
Tucker acknowledged that authorities – including the Bank of England – “need to consider what more we could do to alleviate tight credit conditions in the UK”, adding: “Because both households and small and medium-sized businesses are reliant on banks for loans and credit facilitiesit is serious that bank lending growth has, in aggregate, remained so weak.” (Whether current constraints are regulatory or market-led is debatable, he concedes.)
And as for Newsom’s prediction of significant new lending, the Savills’ man does not expect it to come from the banks that Tucker was referencing.
A “huge structural change” in the property finance world looms, says Newsom, with insurance companies accounting for more than one-third of the current 16 lenders in the market that say they “have the ability” to lend and hold £100m or more.
So as wounded, established players retreat – perhaps to meet shareholder demands more than regulator obligations – new entrants are seizing share. That’s how markets work.
More interesting perhaps is the argument Tucker goes on to develop around an under-discussed aspect of the current situation.
Industry concentration can clearly exacerbate a crisis, he says: “The effects of bank failure or distress can be greater when the industry is concentrated. Domestically in the UK, recovery has been impeded by the fact that the banks worst hit by impairments in property and leveraged-loan portfolios were also the banks that were previously most importantto business lending. The businesses making up LBG and RBS accounted for over 40% of the stock of lending to UK firms in 2007.”
Barriers to entry
And if diversification is healthier than concentration, barriers to entry must be lowered. The growth in lending by insurance companies identified by Newsom suggests that has been delivered. Notably, all but one of the insurers on his 16-strong list had entered the UK lending market since 2008.
But another factor is needed in order to promote diversification, according to Tucker: “We believe that a useful step to lowering barriers to entry will be to lower barriers to exit.” This doesn’t get the attention it deserves. It shouldn’t be so neglected.
I chaired an event for a leading bank this week. The audience was drawn from the property SME world, typically borrowers with a residential or retail portfolio. Question after question circled around the ability or the willingness of banks to lend. Truly, there is no hotter topic.
As Tucker said: “The domestic authorities do not have anything like a magic wand.” No one does.
Savills demonstrates that barriers to entry have come down. Tucker implies regulators have relaxed. Will the market follow suit?
