Commercial Loans – Where Are They?

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As long as banks continue to restrict lines of finance, especially commercial loans, the property market stands little chance of recovering.

The only sector which I am aware of which has rallied since the crash of 2008 is the office market in the West End of London.  The main reason for this is that property investors who had stockpiled cash, and who were looking for the most risk adverse sector to invest in, which also provided the best long-term prospects of growth, identified London offices as being of interest.  For many years, central London offices were the most sought after buildings in the world and as financial institutions, who occupied these buildings, started to recover from the banking crisis, and it was recognized that the West End of London suffered from a lack of new and good quality office accommodation, the prospects of rental and capital growth once again seemed a reality.  The weight of money chasing such a short supply of these buildings caused prices to rise sharply and this trend is still continuing.  Those looking at owning central London offices are mainly UK pension funds with huge inflows of money which they need to spend, and overseas buyers who benefit from the strength of their domestic currencies relative to sterling.  Since they are cash buyers, and as such are not reliant on securing debt to complete their acquisitions, the shortage of credit generally in the market hasn’t had an effect on the pricing of West End offices.  

However, outside of central London, the retail, office and industrial sectors are continuing to suffer.  Although there are many reasons for this, one cannot deny that the main contributing factor has been the reluctance of banks to lend to investors who are seeking to buy commercial property in the UK.  We all appreciate that banks need to appear to be acting responsibly, in light of their past mistakes, and that guidelines now require them to store increased amounts of cash in the event of another financial crisis, but they are being told by the Government to lend and being asked by consumers and investors to lend.  Therefore, why aren’t they lending?  The simple answer to this is that banks are currently making huge profits, as recently evidenced by results from Royal Bank of Scotland, Barclays, Lloyds Banking Group and HSBC, who individually made profits of between £1billion and £7billion for the first 6 months of the year, and are reluctant to commit to any form of transaction which could result in these striking results being adversely affected.

Whilst commercial loans remain scarce, the volume of property transactions will remain low and prices will fail to improve.  In fact, in order for property to sell, prices will have to fall to attract the minority who are still able to buy, namely those with cash and those who can secure debt, albeit at vastly overpriced margins and interest rates.

A recent poll by the Guardian revealed that 65% of people still think banks are not lending enough.  This view is not shared by the banks, who claim that demand for loans has fallen as individuals and businesses are repaying loans instead of taking new ones.  However, you cannot pick up a paper, turn on the radio or watch a report on the television without being confronted by people complaining that they are unable to borrow.  As a result of this, a taskforce is being established by the biggest six UK banks to tackle this problem, which seems to me to be a little strange, since they don’t believe a problem exists, but nonetheless encouraging.

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