No return to commercial loans for Leeds Building Society

THE head of the UK's fifth biggest building society has confirmed he is not tempted re-enter the commercial property market despite the industry's recent resurgence.

Leeds Building Society chief executive Peter Hill.

Peter Hill, chief executive of Leeds Building Society, said the firm had learned its lesson from the financial crisis after it was stung with £40m of impairment losses following a huge fall in commercial property values.

“One of our lessons learned from the financial crisis is to focus on the things that reflect our core competencies so our strategy now is to focus on first charge residential mortgages,” he told The Yorkshire Post. “Over the past five years I think we’ve done that very successfully and we’ve grown mortgage balances by 40 per cent in that time.”

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He added: “Interestingly, UK-wise the commercial property market is growing and Yorkshire and the Humber was one of the fastest growing markets in 2015 for construction and demand for grade a office space is strong.

“Notwithstanding that, we are thinking where is our core competency? where is our risk management capability? and it’s all in residential mortgage lending. Commercial doesn’t feature in our strategy going forward.”

One of the society’s biggest commercial casualties was East Yorkshire shopping village Hornsea Freeport. Leeds took ownership of Britain’s first factory outlet centre via an administration process in 2010 after it fell victim to the downturn in consumer spending.

The building society had lent £16m to former owners Hornsea Estates and Hornsea Estates (No.2) in 2007. The centre was valued at £7m when Leeds acquired the asset. It sold the site to Kames Capital, an Edinburgh-based investment manager in December.

Mr Hill said: “If you look at 2015 results you see impairments that relate to commercial lending were actually quite low but from 2009 to 2014, we did suffer some fairly material impairments as a consequence of our commercial lending portfolio.

“Because we went into the financial crisis with a very strong balance sheet, and because we remained very profitable, we were able to deal with those commercial loan impairments without it affecting our ability to operate and grow the business.”

Leeds has been running off its commercial portfolio since it pulled out of the market in 2008.

“Our plan is to let the portfolio run off naturally,” Mr Hill said.

“Some of the current loans will run off over a long period of time. We could still have a small portfolio in 10 years time but we are not concerned about that.”

Some of the loans have been refinanced through other lenders over the year while others have failed. “Over the last two or three years most loans have been refinanced rather than going into receivership,” he said.

He added: “We feel our current commercial portfolio is very manageable. In 2015 we had one commercial loan which ran into difficulty and the rest of the portfolio is looking pretty healthy.”