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British banks do not like talking about commercial property. Offices, retail and industrial buildings left them with big losses during the financial crisis. Actions speak louder than words, however, and lenders have been quietly flocking to the sector in recent months. That should be good news for investors in property companies, and executives who have been protesting that things are not as bad as they are painted.
Outstanding loans from UK banks and financial institutions to real estate businesses grew almost 10 per cent in the 12 months to February, to £177bn, according to Bank of England data. That was the fastest year-on-year growth rate in at least a decade, and far outstripped the lending growth in any other sector of the economy. Data from the largest banks, collected by UK Finance, has similarly shown a sharp increase in lending.
After a downturn that has lasted for years, this is doubly encouraging for property companies. An uptick in borrowing highlights a growing appetite for deals and investment. Equally importantly, the ample supply of credit is a reassuring sign that providers of capital finally believe property groups’ claims that the industry has turned a corner.
That has been a slog. Even though fears of workforces being forever remote have eased, interest rates have begun to fall and property values have hit a floor. If banks — especially high-street giants such as NatWest and Lloyds that were burned by bad loans in 2008 — are becoming more enthusiastic, it suggests they are no longer quite so worried about falling property prices. It will take more than that to close the gap between asset valuations and market capitalisations for listed groups such as Great Portland Estates and British Land, but the vote of confidence can only help.
That said, it is not clear how far this burst of lending reflects real excitement on the part of lenders, or if property is just the best of a bad bunch. After all, the surge in real estate loans has coincided with tepid demand elsewhere. Overall lending to non-financial businesses rose less than 3 per cent in the year to February, with declines in several sectors including retail, construction and accommodation and food service.
Most big British banks would like to be in expansion mode right now, but that is hard to do when many potential borrowers are too nervous to take risks. Rising demand for real estate loans is better than nothing — returns are decent, but high capital requirements and intense competition put a cap on how big a boost it can provide.
For the property companies, it must be nice to feel wanted. But given their respective starting points — most banks’ valuations, as a multiple of their net assets, are higher than those of property businesses — the surge in lending is likely to be more beneficial for the borrowers than their lenders.