Ratings boost for mutuals over lending

Five mutuals including Yorkshire, Skipton and Leeds were given stable outlook ratings regarding their commercial property exposure.

While commercial property makes up a relatively small proportion of the sector's lending, Fitch warned it can have a heavy impact when loans go bad.

Mutuals are hamstrung by their limited ability to boost capital when times get tough, unlike their bank counterparts.

But Fitch said mutuals' commercial property lending has generally been better quality than UK banks', using tighter underwriting.

"Fitch believes that the likelihood of further capital erosion from commercial real estate (CRE) in rated UK building societies is smaller than a year ago," it said.

"CRE represents a moderate proportion of building societies' overall lending, but loan losses can have a disproportionately large negative impact on societies, especially given their mutual business model and limited ability to raise core capital.

"Societies have improved the quality of their management of CRE loans, typically monitoring borrowers more frequently and incisively, seeking additional collateral, widening interest rate spreads on their loans and encouraging borrowers to refinance with other lenders."

Nationwide, Newcastle and West Bromwich were given negative outlook ratings regarding their commercial property exposure.

Leeds Building Society recently said impairment losses and provisions for commercial and residential property fell to 24m in first six months of the year, from 26.6m a year earlier.

Of these, 14.7m were soured commercial loans, and related mainly to two big loans where it provided subordinated finance. These commercial impairments were down from 18.5m a year earlier.

Leeds bought East Yorkshire shopping centre Hornsea Freeport for 7m earlier this year after lending 16m to its former owners Hornsea Estates and Hornsea Estates (No.2) in 2007, which later went into administration. It plans to sell the centre when conditions improve.

Despite the provisions, Leeds reported a 10 per cent increase in pre-tax profits to 18m, compared with 16.3m a year earlier.

Fitch noted Leeds' ability to report pre-impairment operating profitability "robust enough to absorb larger loan impairment charges".

A spokesman for Leeds said: "The latest comment from Fitch confirms the society's strong and stable ratings, noting our robust operating profitability, which allows us to provide for any potential impact resulting from any further downturn in our limited exposure to commercial real estate."

Skipton Building Society recently reported half-year pre-tax profits of 21.7m, up from 14.7m in 2009, but did not quantify its commercial property exposure. Fitch said Skipton's CRE impairment levels were "minimal".

Skipton finance director Tom Wood said: "Their comments reflect our historic, prudent approach to underwriting and pragmatic efforts at the onset of the credit crunch to manage our limited commercial lending exposure by taking the decision to cap our exposure to commercial lending.

"As a result our commercial portfolio is of very high quality when benchmarked to industry."

Yorkshire Building Society never went into commercial lending and although it acquired a small portfolio from its merger with Chelsea Building Society, said it is winding down this exposure.

MOMENTUM IN SECTOR SLOWS

Latest figures show British commercial property values rose 0.2 per cent in July, from gains of 0.5 per cent in June, showing the market's 12-month rebound has lost some momentum as concerns rise over the state of the broader economy.

Investment Property Databank said in its monthly UK index that British commercial property capital values have gained 15.4 per cent since August 2009.

"The last time UK commercial property managed 12 consecutive months of capital growth was in the month the market peaked, in June 2007, when annual growth rate was 7.1 per cent," said Mark Clacy-Jones, research manager at IPD.

IPD said July's 0.2 per cent positive capital growth matched the figure that kick-started the recovery in capital values at the end of last summer.

The index showed growth in all three sectors of commercial property – offices up 0.3 per cent, retail up 0.2 per cent and industrial up 0.2 per cent.