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New lending to UK commercial real estate fell to a historic low in 2023 as lenders and investors struggled with falling property values, higher debt costs and pressure to deal with troubled loans.
Total loan origination during the year was £33bn, the lowest in a decade, according to a closely followed report by Bayes Business School.
The portion of those loans that went to finance new acquisition fell to the lowest since records began in 2007, at 28 per cent, as lenders focused their time and capital on keeping existing loans afloat.
Chris Gow, head of finance and structured debt for Europe at real estate adviser CBRE, said lenders had priorities identifying “the nature and scale of their problem loans over new loans origination”.
Commercial real estate has been badly hit by the jump from ultra-low debt costs to much higher interest rates, which has made it more difficult to finance deals and strained existing investments as property values fall and debt payments rise.
The Bayes finding marks a contrast with the last major real estate downturn after the 2008 financial crisis, when lenders “closed off their balance sheets to refinance any bad loans” and dumped them into “bad banks”, but were then able to restart lending to new assets fairly quickly, said Nicole Lux, senior research fellow at Bayes and the report’s author.
The current downturn has seen fewer troubled assets pushed on to the market by their lenders at fire sale prices. But leniency from lenders will also mean it takes longer for prices to reset and the market to recover, Lux added.
The volume of real estate deals in Europe fell to a 13-year low in the first quarter, according to MSCI, the seventh successive quarter of declines. UK dealmaking fell 11 per cent year-on-year from the already depressed levels in early 2023.
“There is, without doubt, an enormous amount of capital around looking to be put into debt. Assets that in previous cycles might have traded, we have been able to find refinancing solutions,” said Richard Fine, managing director at Brotherton Real Estate, an independent real estate debt advisory. “There hasn’t been that wholesale distress”
In London, South Korean investor Mirae recently called off the more than £200mn sale of an office building on Old Bailey, home to law firm Withers. Instead, it has refinanced the debt on the building.
Canary Wharf Group last week announced a more than £500mn package of financing, including long-term loan extensions on some of its offices. Like other owners, it agreed to pay down the loans to secure more time.
Still, Bayes did report signs of increasing stress in loan books, with more breaches of loan conditions and a decline in the ratio of income to debt costs. It said riskier loans were concentrated among private debt funds and smaller lenders, while banks were less exposed having been more cautious since 2008.
“The challenge is actually with the second-tier owners who have taken higher leverage. They are the ones who the banks didn’t lend to or don’t want to refinance,” said Lisa Attenborough, head of debt advisory at Knight Frank.
She said “there are some difficult conversations going on” but that as long as borrowers are co-operative, taking back control of a building is “the last thing any lender wants”.
