Lending to UK real estate businesses continues to fall

UK bank exposure to real estate fell to 8.4% in the third quarter of 2012, the lowest level since 2002, according to the latest Bank of England quarterly lending figures.

While total lending has been relatively stable over the last year, down 1.6% over the period, lending to real estate was negative for a 10th consecutive quarter in Q3 2012 with an 8.1% decrease on levels seen a year ago.

The flat overall lending figures mask a difference between lending to individuals and lending to businesses. Indeed, this month’s Bank of England lending figures for individuals were encouraging, with a rise in the number of loans approved for house purchase as well as an increase in unsecured consumer credit.

'The drivers behind a reduction in UK banks’ exposure to real estate have been limited loan origination on the one hand, and the continuing deleveraging of real estate books on the other,' said Jeremy Handley, Director of Valuation Advisory at Jones Lang LaSalle. 'Banks have been unwinding individual loans one by one, placing a particular emphasis on loan book sales. However, the rate at which deleveraging is taking place is likely to slow as it becomes harder for banks to identify easy wins.'

In spite of the continuing limited availability of debt for real estate, demand for the debt that is available is also surprisingly limited. This is particularly noticeable in prime central London investment transactions, where the majority of lenders would be happy to lend, David Lebus of JLL added. 'However, as vendors continue to favour all-equity purchasers, the actual deployment of debt in these transactions is limited.'

In areas where there is significant demand for debt, such as secondary markets and development, banks continue to be reluctant to lend. 'It is hoped that the numerous debt funds being raised by private equity houses may provide funding for these markets currently starved of finance once they begin deploying capital next year,' Lebus added.