Lending to commercial property (Jan.) - Capital Economics
UK Commercial Property

Lending to commercial property (Jan.)

UK Commercial Property Data Response
Written by Prohad Khan
Cancel X

Net lending remained negative in January and we think this is explained by weak transactions and renewed UK lockdown. Looking ahead, any recovery in lending to commercial property is likely to be slow. After all, the weak near-term economic outlook will restrict the availability of credit. And we expect further falls in capital values this year to weigh against a quick recovery in investment activity.

Weak start to the year

  • Net lending remained negative in January and we think this is explained by weak transactions and renewed UK lockdown. Looking ahead, any recovery in lending to commercial property is likely to be slow. After all, the weak near-term economic outlook will restrict the availability of credit. And we expect further falls in capital values this year to weigh against a quick recovery in investment activity.
  • In line with our expectations, net property lending by banks and building societies was again negative in January, at minus £146m. (See Table 1.) This largely reflected a fall in outstanding debt on standing investments, which declined by £259m. That can partly be explained by the continued weakness in property transactions during this period.
  • Meanwhile, net borrowing for development was £113m, the first positive reading since August. (See Chart 1.) We still think developers were reluctant to start new projects, which is consistent with the fall in the commercial sub-index of the construction PMI in January. There may also have been some other headwinds, as the UK re-entered lockdown after Christmas and from post-Brexit trade arrangements.
  • Despite the fall in outstanding commercial property debt in January, the share of property lending remained at 6.9%. As such, it is still near its two-decade low of 6.7% recorded in 2019 and suggests that even a modest rise in defaults would likely only have a limited effect on the banking sector.
  • Looking ahead, we expect net lending to commercial property to remain weak or negative in the coming months. After all, tight virus restrictions are likely to be in place until Q2 at least, which means the near-term economic outlook remains fragile. Even after, we think that property values will remain under pressure and this will prevent a strong recovery in investment activity and lending over the rest of 2021.

Chart 1: Net Lending to Property by Banks and Building Societies (£Bn, Monthly Total)

Table 1: Lending to Commercial Property – Key Figures

 

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Outstanding debt to property(£bn)

162.9

167.7

166.8

170.5

170.6

168.9

169.3

169.8

169.3

168.6

167.8

167.6

– to standing property(£bn)

148.5

152.4

151.5

154.9

155.0

153.3

153.6

154.3

153.9

153.4

152.7

152.4

– to development (£bn)

14.4

15.3

15.3

15.6

15.6

15.6

15.6

15.5

15.4

15.3

15.1

15.2

Net lending to property (£m)

199

4795

-718

3028

29

-1678

117

558

-568

-707

-514

-146

– to standing property(£m)

197

3918

-721

2703

-125

-1542

61

657

-458

-540

-232

-259

– to development (£m)

2

877

3

325

154

-136

56

-99

-110

-167

-282

113

Property as a % of outstanding debt

6.8

6.9

6.8

7.0

7.0

6.9

6.9

6.9

7.0

6.9

6.9

6.9

Source: Bank of England


Prohad Khan, Property Economist, prohad.khan@capitaleconomics.com