16.10.09

By Peter Denton

Easy credit is a thing of the past

Banks are not lending and many people hope for a magical “big bang” solution. I’m not sure why, given that the 1990s downturn took years to work through.

The amount of debt is much bigger — about £300bn in the UK alone. National solutions, such as the Asset Protection Scheme, the National Asset Management Agency (NAMA) in Ireland and bailouts such as that of Hypo Real Estate, do not solve the stagnation — they only avoid other banks joining Lehman Brothers.

Property lending is squeezed as part of a wider agreement with regulators to shrink balance sheets. The Basel Committee on Banking Supervision and G20 group of developed nations have also indicated the need for higher bank capital reserves and losses will further rock banking capacity. This is a less-than-upbeat prognosis. But there are ways banks can help:

Lend Lend if you can, make profits and grow your equity. If necessary, use your profits to provide further against your loan book.

Use cashflow Falling interest rates mitigate against rental value decline. A reasonable number of impaired loans could recover — not just from yield compression or strong asset management, but also from boring amortisation over time.

Be realistic Most banks are pragmatic about their impaired loans. Just because they don’t want to sell doesn’t mean their heads are in the sand. Decisive action and management by banks will become more evident. Negligent or disinterested borrowers — more than weakly capitalised ones — are being addressed.

Innovate It now seems a dangerous word. Commercial mortgage-backed securities were an innovation and, in their purest form, enhanced liquidity. We need a new liquidity solution, from a growing pfandbrief investor base, mortgage REITs, or senior debt funds.

Debt should remain difficult to obtain as this keeps market discipline. Only experienced, well-capitalised, professional investors with solid business plans are then supported. Isn’t this a sensible concept?

Source: Property Week (www.propertyweek.co.uk)