Should the UK Government consider lending directly to the ailing property industry?

Dear Prime Minister,

I’m following with interest your continued effort to encourage banks to start lending to the property industry again. Given my own unsuccessful attempts to borrow during difficult market conditions, I believe your efforts will not be successful.

Over the past twenty years by following one simple old fashioned principle of investing in prime properties only when they can be purchased at excellent value, my investors and I have always profited well from property investment. However, during difficult market conditions, I have always found it impossible to persuade banks to lend for viable propositions. As a result, I had to rely on my Middle Eastern Investors for complete funding. Before wasting your valuable time and taxpayers’ money trying to convince banks to start lending again, I recommend that you ask yourself two important questions:

Could banks be encouraged to lend at a time when property prices are not rising?
My answer: No

By lending a substantial proportion of the property purchase price, banks risk a large amount of their capital for relatively small return. They will only do this if they are convinced that property prices are rising. It is often said that they are the cheapest so-called partner to have in a rising market as they have no equity partnership. However, since they are unduly influenced by short term market conditions, they are also the most impatient and unreasonable type of partner to have in a falling market. We have seen much evidence of this during previous recessions where banks have repossessed many prime properties and sold them at ridiculously low prices.

Are the banks really any better at lending to large property investors and developers than the government could be?
My answer: No

Many modern day bank managers do not have much common sense or experience in the real world of business and are primarily trained to complete loan applications to present to the Credit Committee. The Credit Committee members spend very little time in deciding whether or not to approve the loan and do not interview the borrowers directly. They usually make their decision purely on the strength of the paperwork put in front of them and the lending fund available to the bank at that time. Undoubtedly, this method of lending is irresponsible as no amount of paperwork could possibly replace the expertise required in deciding who to lend to, and understanding the viability of the property they are lending for. In my opinion the government could not possibly perform any worse than the banks when it comes to lending.

In conclusion, I believe that there needs to be a fundamental change in the way in which the banks lend to the property industry. On the one hand, they lend irresponsibly and excessively when property prices are rising, only to become irrationally fearful and stop lending altogether when they think the property market is falling. In the meantime however, the only solution to increase lending to the ailing property industry is for the government to set up its own Credit Committee consisting of members with expertise and practical business experience, and start lending directly.

Yours sincerely,

Mohammad (Mamad) Kashani-Akhavan
info@glfinance.co.uk