“Well, if the number of enquires we are fielding for commercial mortgages is anything to go by (writing this in December 2009), then yes, there is – my concern is, this may be short lived.

“There was never any doubt that a correction in the market was needed and, if nothing, it’s so good to see a return to sensible lending… well, at least amongst those of us still lending.   Previous years have been a struggle for National Counties, a small building society battling against the might of the big lenders who, at the time, seemed to be able to outdo us left, right and centre, whilst we stuck to our guns in search of high quality investment deals on terms that returned a profit – there’s a novelty!  For building societies though, we tend to forget where our funds, in the main, come from – our savers, members and investors, who, in turn, are looking for a return.  In very basic terms, and apologies for putting this in quite so simple form, if we are to attract funds to re-lend as mortgages, and by that funds from outside the wholesale markets, the interest return has to be attractive – that’s our cost for the money.  So, it’s fair to say, we need to lend it back out at a higher rate in order to cover our own costs and make a profit.  This presents rather an unfair playing field when compared to the nationalised banks, which the taxpayer has been good enough to support (ok, so, the taxpayer didn’t get much option) and for whom ‘cost of money’ is not so critical.

“Whilst our commercial lending strategy has paid off in terms of possessing a good quality book with little in the way of default, it has been difficult to grow the book significantly given our ‘cherry picking’ ideology and our rivals’ ability to win business from us on more attractive terms….. until now?  I see the current climate as our opportunity, with fewer lenders active in the market and those who are, tightening their lending criteria to something akin to ours of the last few years. 

“2009 has seen us grow our book by 23%; it has seen us focus our attentions on the prime investment market, sadly at the expense of withdrawing altogether from the owner occupier sector.  Hopefully we will continue to reap benefits from the current climate, but it would be incredibly short-sighted to think that all is rosy in the garden.

• There are many concerns to consider – the horrendous devaluation of commercial property already experienced (44% 2008-2009), with a further 16% drop predicted for 2010 (if CBRE’s ‘Dubai effect’ predictions are accurate), leaving many lenders exposed and many borrowers in breach of loan-to-value covenants; the changing face of the ‘retail’ high street, posing doubt over even the strongest of tenants; cost of money; and so on.  However, I also have serious concerns regarding the implementation of legislation and rules which, although intended to guard against the horrible times we find ourselves in from happening again, may only serve to compound the situation. 

“The general economy needs lenders to lend; investors to invest; businesses to trade – the wheels of commerce need to keep turning.  However, it is difficult for us to fulfil our role in this cycle if the ever-growing burden of legislation prevents us from doing so.  I have in mind, very much from a building societies’ perspective, such instruments as the Financial Services Compensation Scheme (FSCS), ever-more stringent capital ratio requirements and the FSA 09/17 Consultation Paper (A Specialist Sourcebook for Building Societies: Enhanced supervisory guidance on financial and credit risk management).  Such devices may serve to kill off commercial lending activity for smaller mutuals, turning the societies themselves into nothing more than community services.

“One must understand, unlike the media hype, not all commercial lending is bad!  I don’t think I’ve read any newspaper article as yet that hasn’t included commercial lending as a factor in the woes of lenders – perhaps journalists should dig a little deeper into the processes behind those lending decisions.  Unrealistic performance targets in the search for greater and greater profitability perhaps?  Lack of understanding of the market?  Not listening to those who have been through recessions and crises of the past?

“As I commented above, it’s refreshing to see a return to sensible lending – where managers are hopefully no longer driven by volume targets, but by the quality of their lending decisions – but how long will it last?”

Article contributed by Steve Iles – iless@ncbs.co.uk

www.ncbs.co.uk

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