You won’t often see us talking up Robert Peston but he makes some very good observations in his recent blog on why Quantitative Easing is not leading to more bank lending.

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/08/what_rbss_results_say_about_qe.html

There is a strong correlation between the strength of bank balance sheets and the volume of capital available for commercial real estate? Banks have to shrink their loan books and the toxic world of property is a great place to start.

To support Peston’s theory here is one little anecdote. The best performing loan originator at one major bank group is currently deemed a start performer having only written two loans in 2009. The reason being that he has won a load of new deposits, from cash rich property investors. He has lent about £100m and collected £500m of deposits. His perfect customer has lots of cash and no need for troublesome new loans.

As my grandfather used to say, “that’s the problem with banks, they only want to lend money to people who don’t need it!”

To provide a bit of balance to my last post criticising a certain elements of the property press, I would like to commend Daniel Thomas’ editorial in the FT this morning(http://www.ft.com/cms/s/0/5f48b60c-2856-11de-8dbf-00144feabdc0.html).  If you can’t be bothered to read it, the title is “Cash Buyer’s Won’t Sustain Commercial Market Forever” which pretty concisely  sums up the following 973 words.

Morgan and I have shared this slightly sceptical view of the current market for a little while, but I am particularly impressed that Daniel did not have to resort to the stock in trade cliches of “green shoots” or “dead cat bounce” or my own favourite “bear market bull trap”.

When this is considered alongside the current availability of new debt and, more interestingly, what happened to net lending in the last property downturn of the early 90’s then anyone pinning there hopes on a sustained bounce back in the next 12 months is likely to see them dashed.

As you can see in the link to this graph, net-real-estate-lending, stayed stubbornly around zero from 1991 to 1997.  Given the massive deleveraging that must occur to allow the global economy, never mind the bloated balance sheets of our banks, stuffed full of real estate loans, to balance, it is practically impossble to forsee a return to any form of credit driven recovery over the short to medium term, for all but the best of assets.

That’s not to say that secondary property won’t perform or there will not be very good money to be made, only that initial yields have much further to fall to allow investors to make equity type (>15% IRR) returns on very lowly geared purchases.

No, not the classic Bee Gees hit from 1977, masterfully reworked by Take That in 1996, but a question of how deep and what shape will the recession be?

Will we bounce in and out, the classic “V” shape, as most economists predict? Or will we scrape along the bottom for a while, before a vertiginous recovery?

Clearly “L” is the ugly option with no recovery n sight.

The answer, I’m sure, won’t be simple, hopefully the general economy will follow a “V” shape as a result of the governments massive fiscal and monetary easing.

Housing and commodities could well be a “U”. New supply in housing and investment in capacity of commodities has fallen off a cliff as their price has plummeted, there might be no swift recovery, but once demand does recover, in line with the general economy and the slack taken up, the lack of new building or investment in refineries, say, could lead to a sharp recovery in asset prices.

But what of commercial property investment?

People in the industry forget that this is a discretionary activity and a case for it, especially in light of its recent catastrophic performance, will need to be made again, based on no guaranteed yield compression, low gearing and poor rental growth.

Until that case is compellingly made, we could be in for a “L” of a time.