Net lending to UK commercial property had its sharpest drop in close to three years in Q3 as banks and building societies lent a net -£2.2bn to the industry.
Three months of net positive lending came to an end in July, reversing to £-1.2bn before tumbling further to -£2.5bn in the three months to August.
A slight positive turn in September brought the quarter’s net total to -£2.2bn.
These falls were limited to investment finance, with development finance remaining flat in Q3.
The numbers last quarter showed that UK banks and building societies were once again gearing up their property activity with a largely positive 2016 and H1 2017. This quarter’s losses, however, have been considerably sharper than the mild gains in Q2.
It means the stock of outstanding loans continues to hover between £149bn and £151bn, as it has for two years. But with growing lending to the rest of the economy, property lending as a proportion of the total has fallen to a 16-year low of 6.9%.
Comment, Eduardo Gorab, UK property economist, Capital Economics
In aggregate, net lending to the sector stood at -£2.2bn. Not only does that compare poorly with the previous quarter, in which net lending was virtually flat, but it was also weak if we consider than net lending to the economy as a whole stood at £32.7bn.
However, the weakness in property lending was exclusively driven by standing investments.
With riskier development lending holding up comparatively better, this seems to imply that the lack of activity in the lending market reflects an also subdued investment market.
But it’s not all bad news. One consequence of the third quarter’s contraction in net lending to commercial property is that the banking sector is less exposed to a downturn in capital values. In fact, property-related loans account for 6.9% of traditional lenders’ books. That is significantly lower than the 11.6% recorded in Q4 2008.
This should go some way to allaying the fears stoked by some recent analyses suggesting that a large falls in capital values lie just over the horizon.
Not only are we not convinced that these are inevitable, but even if such falls were to materialise, the risks that this would trigger a rash of fire-sales and the knock-on effects on the wider economy are likely to be smaller than during the last crash.
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