The increase in February’s net lending total was the first rise since September last year. We think this can be explained by the extension of payment holidays rather than a rise in new loans. Looking ahead, given the fragile near-term economic outlook and many tenants in rental arrears, we expect the availability of credit to tighten and net lending to fall again in the coming months.
Net lending to turn negative again despite February’s rise
- The increase in February’s net lending total was the first rise since September last year. We think this can be explained by the extension of payment holidays rather than a rise in new loans. Looking ahead, given the fragile near-term economic outlook and many tenants in rental arrears, we expect the availability of credit to tighten and net lending to fall again in the coming months.
- Net property lending by banks and building societies rose by £474m in February compared to a net repayment of £146m in January. (See Table 1.) This was the first monthly rise since September last year and reflected a rise in outstanding debt on standing investments, which increased by £562m. This is despite the weak recovery in investment activity at the start of this year. We think the rise is likely to reflect investors extending their payment holidays on existing loans with their lenders, rather than new lending.
- Meanwhile, net borrowing for development turned negative to minus £88m in February from £113m in January. (See Chart 1.) While this was at odds with a rise in the commercial sub-index of February’s Construction PMI, we think this was down to the restarting of delayed projects, not an influx of new ones.
- Outstanding commercial property debt as a share of property lending remained low at 6.9% in February. This figure remains low by past standards and we expect that even if there is an upturn in property write-offs as government support is removed, property is not likely to be a systemic risk to the banking sector.
- Our view is that net lending to commercial property will turn negative again in the coming months. Given some virus restrictions are likely to be in place for the next few months, the near-term economic outlook remains soft. Further, March’s poor rental collection figures confirmed that some tenants remain deep in arrears, which will hit the bottom line of landlords and limit their ability to borrow. As such, we expect banks will act cautiously and this will prevent a strong recovery in commercial property lending this year.
Chart 1: Net Lending to Property by Banks and Building Societies (£Bn, Monthly Total)
Table 1: Lending to Commercial Property – Key Figures
Outstanding debt to property(£bn)
– to standing property(£bn)
– to development (£bn)
Net lending to property (£m)
– to standing property(£m)
– to development (£m)
Property as a % of outstanding debt
Source: Bank of England
Prohad Khan, Property Economist, firstname.lastname@example.org