According to the Bank of England Credit Conditions Survey, published for the first quarter of the year last week, the commercial property market seems to be showing signs of recovery, with credit availability being on the rise after ten consecutive quarters.
The report suggests that commercial prices which have been falling in recent years have been causing credit availability to fall, but these fortunes should change with recent reports suggesting that prices are back on the rise. The study concluded that the sector should not change too dramatically in the next three months of 2013, but signs are positive.
Many investors have suggested that a new ‘slotting’ method has dramatically changed how they look at future investments. This system requires banks to place commercial real estate loans into five categories: strong, good, satisfactory, weak and default. As you go down each level, the bank has to hold more capital. Many analysts have suggested that this ‘slotting’ system could strengthen risks by reducing how much banks have in their current stock value.
By forcing certain sales of properties, there could be major losses in loans within the commercial sector. Phil Tily, managing director of commercial property research firm IPD, said: “The problem with banks’ risk models was the lack of sound market data going into them. Based on our findings, slotting could cause serious harm if the impact on the property market and its relationship to the wider economy are not fully understood."
The Bank survey further highlighted that nine per cent of pension funds expected to raise their allocation to the property sector over the next six months, and 13 per cent in the next three years.
Main yields across the commercial sector remain at least six per cent, therefore encouraging more potential investors to turn towards the market.