Alarm at UK property risk

Banks have this incredible knack of losing money in every

single cycle.

Banks are relaxing safeguards as they boost lending to commercial property developers in the UK, fuelling concern they’re sowing the seeds of another real estate collapse.

“Banks are falling into that same old cycle of loosening their underwriting standards,” said Joe Valente, head of research and strategy at JPMorgan Asset Management in London.

“They’re doubling up on risk because they’re increasing development activity in smaller regional markets which, until now, have had very little in the way of liquidity.”

The decision to ease loan standards means lenders are less resilient to any downturn in values, according to financial stability officials at the Bank of England. Britain spent about £1 trillion ($2.1 trillion) propping up the banking system during the financial crisis, which ended a decade-long commercial property boom.

The BOE’s Financial Policy Committee would consider “appropriate action if underwriting standards threatened to evolve in an unsustainable way”, the panel said last month.

Banks and credit providers are now willing to offer senior debt to property developers at loan-to-value ratios of 70 per cent, compared with 60 per cent three years ago, Londonbased lender Laxfield Capital said in

Joe Valente, JPMorgan Asset Management

an April report. Before the 2007 crash, the ratio was 75 to 80 per cent.

Some lenders are loosening debt terms and protections to win business, according to John Feeney, the global head of commercial real estate at Lloyds Banking Group.

“Borrowers who are in strong negotiating positions have been willing to push on some fundamentals of covenants,” Feeney said. With interest rates at historic lows and the European Central Bank’s bond buying programme crushing returns on fixed-income securities — euro-region sovereign debt still yields less than 1 per cent — the higher yields available from real estate are making the market attractive to investors.

The amount of new capital targeting commercial property globally is now a record US$429 billion ($587 billion), broker DTZ said in April.

Loosening of lending standards was likely to accelerate in coming months, said JPMorgan’s Valente. “Banks have this incredible knack of losing money in every single cycle.”