Hopeful signs for property investors as fall in bank lending slows
Bank lending to property investors down 28% since 2011.
Lending to the property sector is showing signs of recovery as the long-term decline in bank finance begins to slow, says EMW, the commercial law firm.
Bank lending to investors in the property sector has levelled out over the last year*, down just 1% from £136.2bn in July 2014 to £134.7bn (see graph below), raising hopes that lending to the sector may soon rebound after a 15% drop in the previous 12 months, from £159.3bn in July 2013.
EMW adds that lending to property investors is down 28% in total over the last five years, from £187.6bn in July 2011.
EMW explains that although banks remain cautious, the slowdown in the decline suggests that the banks' risk-off approach to lending to property investors is almost at an end, helped in part by the number of write-offs of bad debt falling by almost half to £23.2bn last year from £44.7bn in 2013**.
EMW explains that these reduced losses on property lending have freed up more capital for the banks to lend to the real estate sector. Increased capital values for commercial property in London have also encouraged banks to lend with higher loan-to-value ratios.
Minal Thakarar, Principal at EMW, explains
"The banks' appetite to lend to property investors is at its highest level since the financial crisis. For the first time since the financial crisis the decline in the amount of lending to property investors has tailed off - investors are now more optimistic about seeking funding from the banks. The sector was hit harder than most by the recession so the possibility of increased lending will provide welcome relief."
Property sector had relied on alternatives to bank lending during the financial crisis. EMW adds that there has also been a particular increase in lending by the flood of recent arrivals into the finance market, such as online peer-to-peer lenders and challenger banks, which are now providing significant competition to the established players.
"The withdrawal of lending from the property sector has also been helped by the emergence of challenger banks and peer-to-peer lenders targeting the market."
EMW says that as banks reduced lending to the commercial property sector, the gap was filled in part by hedge funds, insurers, fund management companies and High Net Worth individuals.
"These alternatives to bank lending provided a vital lifeline during the financial crisis, and stepped in to fill some of the funding gap left by the banks. As the appetite of banks to lend to the sector recovers, how much of an impact this will have on the sector's reliance on these other sources of funding remains to be seen."
Encouragement to the property sector as decline in bank lending slows.