Commercial real estate lending hits ten year low

New lending for commercial real estate fell 33 per cent last year to its lowest level since 2013, according to the latest bi-annual report from Bayes Business School, (formerly Cass). Researched and written by Dr Nicole Lux, Senior Research Fellow at Bayes Business School, City, University of London, the report also shows that a significant portion (42 per cent) of the £170 billion of loans outstanding will have to be refinanced within 12 months. Dr Lux expects that will cause ongoing stress in the market.

The respected Commercial Real Estate report reveals new lending reached £32 billion – its lowest level since 2013, while total outstanding debt is at its lowest level since 2017, standing at £170 billion in 2023.

Dr Lux said the fall in outstanding debt probably stems from lenders not replacing repaid debt with new loans at the same pace. This, she suggests, is probably due to low overall transaction volume in real estate equity markets, together with valuation uncertainties and discrepancies in debt transactions.

Other key findings from the report, which covers data up to December 2023, include:

  • All lender groups were affected by the decline in lending appetite. New lending declined by between 14 per cent (UK banks) and 50 per cent (other non-bank lenders).
  • New development lending totalled £5.8 billion – with just over half (52 per cent) going to residential development financing. However, the overall development debt pipeline declined, and development lending accounted for only 16 per cent of all new lending.
  • Some 30 per cent of residential development finance came from small lenders (with balance sheets under £1 billion), which may be more at risk of ceasing business within the next 3-5 years or of merging with larger funds.

Dr Lux’s reports record and analyse the latest structural changes taking place in the real estate investment and lending markets twice a year.

Dr Lux said: “The UK lending market is becoming more binary, with borrowers sourcing their debt either from UK banks or from debt funds. European banks are finding it increasingly difficult to provide funding due to ECB regulations and implementation of Basel IV rules* as well as unfavourable currency movements between sterling and euro funding costs.

“The share of international banks actively lending to commercial real estate in the UK market has been falling since 2018. Historically, these banks provided 32–34% of financing, but their share dropped to an historical low of 25 per cent last year.”


International factors

Peter Cosmetatos, Chief Executive Officer of CRE finance trade association CREFC Europe, said: “This report shows how lenders handled a very difficult year for CRE in 2023. Despite continuing stress in the UK CRE market, a range of diversely funded lending has generally remained open. The pullback by international banks is one to watch: regulatory and commercial challenges in their home jurisdictions may be more decisive for many of them than the state of the UK market.”

Aparna Sehgal, a partner with Dechert, said: “As always the results of this report are illuminating and confirm what we, as CRE market participants, know through our engagement in this space: there is more deal activity, and more commitment to deal activity, in each six month block as compared to the previous period, but overall transactional levels, particularly the volume of new money financings, remain constrained. The data on pricing stabilising (albeit coupled with lower leverage) is encouraging however – and should lead to more transactions being done.

“The continuing increase in alternative lenders providing capital also reaffirms that the CRE market remains attractive to investors (and indicators outside the scope of this report suggest a wider pool of available capital through the provision of back-leverage). Collectively, the CRE eco-system looks ready to respond to more favourable macro-economic conditions as these crystallise.”

Chris Gow, CBRE’s Head of Finance and Structured Debt (Europe), said: “2023 was a year when lenders sought to prioritise the identification of the nature and scale of their problem loans over new loans origination. This process is now largely complete and we have seen a strong recovery in lender liquidity so far in 2024. Competition is strongest for investment loans in all asset classes and for developments in the most favoured Living, Hospitality and Data Centre sectors with pricing, leverage and covenants all becoming more borrower-friendly.

“Some lenders are more assertively protecting their positions on defaulted loans. While enforcement rates are increasing, they remain very low overall. Combined with Amend & Extend Strategies deployed by many lenders, we believe the bulk of short term maturities will be solved over a period in excess of 12 months.”


Mid-year recovery?

Ben Thomason, head of UK and EMEA Debt Advisory at Colliers: “The findings in the Bayes report highlight just how much the real estate market has been impacted by rising rates and the impact on servicing, which resulted in exceptionally low transaction volumes last year.

“In the interim we’ve seen ever more debt funds being launched which are able to move quickly, provide greater flexibility, and are able to take a view on ICRs and overall covenant packages. However, we are expecting the wheels to start turning again towards the middle of this year as interest rates and inflation starts to fall. We are already seeing margins contract to well below 200bps for strong propositions with lower ICR requirements from a number of the main UK banks. At the same time confidence is returning to the market from investors as pricing expectations have settled following a period of readjustment over the last year.”

Nick Harris, Head of UK and Cross Border Valuation at Savills, said: “The higher underlying cost of money in 2023 curtailed the viability of many commercial property transactions.  Values in most sectors fell and the availability of stock to the market became restricted which resulted in a decline in new loan origination in comparison with 12 months previously.

“The latest Bayes report also shows that lenders increasingly became inward focused, seeking to refinance their loans, which accounted for 42% of their total lending. Although loan breaches have increased, lenders have generally been supportive of their customer base, especially where there is debt interest cover.  “Loan extensions or restructuring were the preferred options, rather than enforcing sales into a weaker market.”