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UK Lending scheme to benefit commercial property

The Bank of England announced two new lending schemes last week to revitalise the ailing British economy, which continues to struggle amid the woes of the Eurozone crisis.

The typical dose of defeatism rose forth. The BBC was smattered with the usual clamour of predictions that the scheme would fail before
it had even started.

But certainly, banks are eager to co-operate in the interests of pursuing a healthier balance sheet, and one formidable commentator sees an opportunity for the commercial property market to benefit.

Collateral Damage
One of the announced lending schemes, the elaborately named “Extended Collateral Term Repo”, has already begun in earnest.

Banks gathered en-masse yesterday at the first monthly auction held in Threadneedle Street to snap up all £5 billion on offer from the Bank of England.

Not only does the scheme allow banks to borrow at much lower rates (as low at 0.75%, just above the base rate), but it also allows them to secure these loans against poorer quality assets than the Bank of England would normally accept. 

So, the Bank is clearly trying to take decisive action to revitalise the flow of credit. This will effectively be a targeted form of quantitative easing – up to a value of £140 billion – with the emphasis on high-street banks lending outwards    

And the falling rate of inflation, down to 2.8% in May, gives the Bank the flexibility to increase the loan volume on offer from its existing £5 billion, and/or the frequency of its auctions.

One Winner: Commercial Property
To one formidable commentator, Douglas McWilliams, chief executive of the Centre for Economics and Business Research (CEBR), commercial property will be the one victor of such a scheme.
"I doubt if the mechanism will have more than a marginal impact on most forms of corporate lending," he said. “But it might have an effect in two areas: commercial property and home mortgages." “The UK still has a lively commercial property market despite the state of the economy and this additional access to money looks to be highly suitable to provide additional finance for the sector." “And by making mortgage lending more easily available, it will be possible for lenders to edge up loan to value ratios which could slash the deposits required from first-time buyers by as much as a quarter."

Value Judgments 
Inevitably, it will take time to assess the impact that the lending scheme will have. Much will surely depend on how forcibly the Bank of England insists that these cheaper funds are passed on to individuals and business companies in terms of loans and commercial mortgages.

But the prospect of an additional boost for the UK business property market can only raise the outlook for a sector that has remained resilient in the face of recession, but weakened nonetheless.

Carlo Pandian is a freelance business writer and blogs for UK Business Property on real estate, investment and properties. When he’s not online, Carlo enjoys swimming, cycling and travelling around the many sights of Europe.

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