Comment – January 2013

JANE ROBERTS Lloyds makes a bigger splash as debt tide shows signs of turning

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Lloyds makes a bigger splash as debt tide shows signs of turning

The property teams at Lloyds have been out spreading the word that the bank has much higher targets for real estate lending in 2013, targets that seem to have taken even them by surprise (see ‘Lloyds raises its target for real estate lending in 2013′).

But it’s a pleasant surprise and is backed up by the bank’s corporate real estate head, Richard Heath, who couldn’t discuss figures ahead of Lloyds’ 1 March results, but did say the real estate teams are looking for opportunities to work with new clients in order to grow.

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This is not the song most UK banks have been singing for the past several years, so borrowers could be forgiven for being sceptical. Or has the lending tide really turned?

Slotting is coming in (see ‘FSA puts pressure on banks to adopt slotting’), which may make some lending more difficult for UK banks, but there are pluses. Lloyds’s cost of capital has reduced since this time last year because its funding costs are lower and it has made good progress with slashing its problem loan book.

Its loan portfolio sales have been judged a success: selling Irish non-performing loan portfolio Project Prince at 17p on the pound may sound horrible and it is, but the book was impaired by 92% – so the bank booked a profit.

The Funding for Lending Scheme encourages banks that draw the funding to maintain their net books and make new loans to small and medium-sized enterprises. It isn’t terribly clear what effect the scheme has had in the commercial property market yet, but Lloyds and Santander both apply the FLS funds to commercial and residential real estate.

Then there are the non-traditional lenders, the insurance companies and debt funds. It would be amazing if these new sources of debt aren’t more active in 2013 – they have to deploy capital to be credible and some of them have promised high returns.

So as the Association of Property Lenders’ Andrew Goodbody says, there should be noticeably more appetite to lend this year for a variety of reasons. The Bank of England’s latest Credit Conditions survey has already picked up on this uptick in available debt (see analysis), yet it also said borrowers didn’t seem to be queuing up to take the money.

This could be partly because so much of last year’s investment into UK property was by cash-rich overseas investors who didn’t often want debt. It could also be that a little more time is needed to get the message out and start matching the right borrowers with the right lenders.

Focusing on prime London property won’t get the capital deployed or the margins lenders and investors want, nor will targeting property’s cream – the big REITS that have been shunning banks whenever they can and cutting leverage.

In any case, debt capital is needed elsewhere. In 2013 expect to see lenders start funding value-added properties and even increasing leverage – but only for experienced borrowers, for a price and where there are underlying cash flows.