New real estate loans plunge to decade low

New lending in real estate has slid by a third to its lowest level in a decade in one of the most “difficult” years since the global financial crisis, according to the latest figures from Bayes Business School. Loan origination dropped to £32bn last year – its lowest point since 2013. At the same time, total outstanding debt fell by 14% to £170bn – its lowest level since 2017. Nicole Lux, senior research fellow at Bayes, said the decline in the total owed most likely stemmed from lenders not replacing repaid debt with new loans at the same pace. Some 42% of the £170bn owed needs to be refinanced within 12 months, which is expected to pile more pressure onto real estate firms. Defaults on the rise The loan default rate reached 3.9%, increasing on the previous year’s equivalent of 3.5%. 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.” All lender groups demonstrated a decline in deal flow. New lending declined by 14% from UK banks, and 50% from non-bank lenders such as debt funds. German banks reduced their UK loan books by 17% during the year. International banks reduced their activities to account for a quarter of the UK market, compared with 32-34% before Brexit. UK banks and debt funds, in particular, dominate lending in the regions, excluding London and the South East. “A difficult year” Peter Cosmetatos, chief executive of Commercial Real Estate Finance Council Europe, said lenders “handled a very difficult year” for real estate. However, he noted that “a range of diversely funded lending has generally remained open”. Cosmetatos added: “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.” The pipeline for development finance shrank during the year, with £22.8bn at year-end. New development lending accounted for 16% (£5.8bn) in 2023, compared with 23% in the previous year. Just over half of that amount is going towards residential developments. Nine lenders quoted terms for secondary retail, of which seven were banks. By contrast, 45 and 43 lenders were prepared to finance prime logistics and student properties respectively. In comparison, 39 lenders quoted terms for prime offices. Bayes noted that interest in non-prime hotels remained limited. Only 10 lenders offered speculative development finance, while 19 offered terms for pre-let developments. Niche asset interest Researchers said there was increased interest among lenders for niche asset classes such as data centres and life sciences, but not senior living. Average loan pricing remained largely stable across property types during the year. Loans against prime office properties ended at 275 basis points, marking an increase of 5bp over the period. Pricing remained competitive for super-prime properties, ranging between 160 and 200bp. When it comes to alternative asset classes, insurance companies offered some of the most competitive margins against hotel assets (315bp), as well as for student housing (239bp). All lenders offered competitive terms for residential properties. Photo © Stocktake/imageBROKER/Shutterstock