August’s solid rise in net lending is unlikely to be sustained. Indeed, with capital values set to decline further in the months ahead, we expect that demand for credit will fall from its current levels this year.
The rise in net lending unlikely to last
- August’s solid rise in net lending is unlikely to be sustained. Indeed, with capital values set to decline further in the months ahead, we expect that demand for credit will fall from its current levels this year.
- Net lending to the UK economy as a whole shot up in August, possibly driven by the fact that borrowing costs dropped to near historic lows. Against this backdrop, net lending by banks and building societies to the UK commercial property sector also rose by £0.8bn in August. (See Table 1.) That followed a slight fall in July and took outstanding debt to property to its highest level since late 2014. The key driver was net lending for standing investment which rose by a solid £0.7bn in August, following a small fall in July. And, at £73m, net lending for development was also positive.
- Of course, the monthly data tend to be volatile and can be influenced by large one-off loans. Indeed, the three-monthly rolling average actually rose by just over £2bn, the smallest amount since April. (See Chart 1.) And within that, net lending to standing development slowed too.
- We expect net lending to weaken from its current levels in the coming months. Indeed, the latest monthly MSCI figures show all-property capital values falling. And ongoing Brexit-related uncertainty is only going to weigh on investors in the months ahead. Granted, a further delay to Brexit, which we think currently has the highest probability, should keep interest rates lower for longer. But as we’ve argued before, weak demand for credit is likely to have a bigger impact on property lending.
- The upshot is that, with economic growth treading water and uncertainty prolonged, capital values are likely to continue on their downward trend which will hold back lending in the months ahead.
Chart 1: Net Lending to Property by Banks and Building Societies (Bn, 3m Rolling Total)
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
Gabriella Dickens, Assistant Economist, 020 3974 7421, email@example.com