Property owners don't have many reasons to thank financial regulators. After all, the more capital banks need to hold against their assets under Basel III, the keener they will be to call in their bad debts. That could dampen the recovery in commercial property values for a good half-decade.
But there's some succour for property bulls in Solvency II, the new capital adequacy regime for insurers. Because they won't have to hold any extra capital against property loans, some hope insurers will fill the gap left by the deleveraging banks.
Both Legal & General and AIG have been busy recruiting property-lending teams, for example. They are two of six new lenders that have entered the UK commercial property market since July, according to research by Savills. "Margins have increased and loan-to-value ratios have fallen, so it's both more profitable and less risky to do lending," explains William Newsom, Savills' head of valuation, who calls the development "extremely positive news".
Insurers typically make more attractive creditors to property companies because they take a longer-term view. Grey-haired City types recall that insurers used to be major property lenders in the 1960s and 1970s, before the banks priced them out of the market. Banks focus on the business cycle, so are reluctant to lend for more than five years. But insurers, whose perspective revolves around life funds, often offer loans for 15 years on more flexible terms. That aligns them better with the property cycle.
For example, an innovative – if morbid – refinancing deal last month made this alignment explicit. Partnership Insurance agreed to lend residential landlord Grainger £50m (with further loans expected), repayable as and when Grainger's equity-release tenants die, vacating the houses for sale. The average maturity is estimated at 11 years.
But there are two reasons to doubt that insurers will ride to the wholesale rescue of property markets. First, just like the banks, they are only taking on good deals. "It's a very competitive space, and everyone wants to lend against well-let investment properties," says Graham Prothero, finance director at Development Securities. To illustrate, L&G may have recruited a team but it has yet to write any loans.
Second, insurers may be moving into lending even as they move out of direct property investment. Solvency II will force them to hold a 25 per cent capital cushion against bricks and mortar. That's better than the 39 per cent they need for equity investments, but the industry still argues it will be forced to cut its exposure. There may be no short-cut on property's recovery route after all.
