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New lending to commercial property in the UK fell to historic lows in 2023 as lenders and investors struggled with falling property values, higher debt costs and pressure to deal with bad loans.
According to a closely followed report from Bayes Business School, total lending during the year was £33 billion, the lowest in a decade.
The share of these loans used to finance new acquisitions fell to 28 percent, the lowest level since records began in 2007, as lenders focused their time and capital on keeping existing loans alive.
Chris Gow, head of finance and structured debt for Europe at property adviser CBRE, said lenders’ priorities were to “identify the nature and extent of their problem loans rather than taking on new loans”.
Commercial real estate has been hit hard by the jump from ultra-low borrowing costs to much higher interest rates, making it harder to finance deals and straining existing investments as property values fall and debt payments rise.
The Bayes result represents a contrast to the last major real estate downturn after the 2008 financial crisis, when lenders “closed their balance sheets to refinance bad loans” and dumped them into “bad banks” but were then able to lend again relatively quickly on new assets to create, said Nicole Lux, senior research fellow at Bayes and author of the report.
The current downturn has resulted in fewer distressed assets being put on the market by their lenders at knockdown prices. But lenders’ leniency will also mean it will take longer for prices to rise and the market to recover, Lux added.
Real estate transaction volumes in Europe fell to their lowest level in 13 years in the first quarter, the seventh consecutive quarter of declines, according to MSCI. Compared to the already low levels of early 2023, UK deals fell 11 percent year-on-year.
“There is undoubtedly an enormous amount of capital to be leveraged. “For assets that may have traded in previous cycles, we have been able to find refinancing solutions,” said Richard Fine, managing director of Brotherton Real Estate, an independent property debt consultancy. “This general emergency did not exist”
In London, South Korean investor Mirae recently canceled the £200 million-plus sale of an office building in the Old Bailey, home of the Withers law firm. Instead, the debt on the building was refinanced.
Canary Wharf Group announced a £500m funding package last week, including long-term loan extensions for some of its offices. Like other owners, he agreed to pay back the loans to buy more time.
Still, Bayes reported signs of increasing stress on loan books, with more breaches of loan terms and a decline in the income-to-cost-of-debt ratio. Riskier loans are concentrated in private debt funds and smaller lenders, while banks are less exposed as they have been more cautious since 2008.
“The challenge really lies with the second-tier owners who have achieved higher leverage. They are the ones that banks haven’t lent to or won’t refinance,” said Lisa Attenborough, head of debt advice at Knight Frank.
She said “there are some difficult conversations going on” but as long as borrowers are cooperative, taking back control of a building is “the last thing a lender wants.”