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Commercial lending weakens

5 August, 2008

Commenting on the latest data concerning the commercial sector, the company said: “[The latest] data on commercial property lending flows are likely to mark the turning point that we have been expecting. Given the credit crunch and the weakening economy, further soft lending data will almost certainly be seen in the quarters ahead. The latest drop in development activity also suggests that concerns about the economic outlook and the strength of occupier markets are rising.”

At the aggregate level, lending remained fairly solid. Total lending flows across the banking sector were £44 billion in Q2, lower than Q1’s figure of £61 billion, but still up by 50% year on year. In the property sector, however, the picture was much weaker, with new lending flows of £6.8 billion in Q2, down by 25% quarter on quarter and by 20% year on year.

Over the past six months or so, the relative strength of property lending flows has been difficult to reconcile with the continued problems in the wholesale financial markets and anecdotal evidence of tighter credit conditions. Today’s data, however, are much more consistent with that underlying environment, according to Capital Economics.

“Indeed, in a recent Commercial Property Focus, “What are the prospects for lending to commercial property?” (24th July 2008), we noted that property lending flows were surely at, or very close to, their peak. Moreover, looking ahead, we believe that lending flows are in for an extended soft patch, as lenders continue to pull-back from risk. That can only add to downward pressure on commercial property prices. A lack of finance will clearly also be bad news for developers, a sector of the economy that is already struggling badly.”