Bayes research: new lending to real estate still strong in UK

Lending to commercial real estate remained strong throughout last year in the UK and 2023 started on a high after high refinancing activity in Q4 2022, according to research by Bayes Business School, formerly Cass, which is being released today.

Bayes’ bi-annual real estate report shows that, despite the rise in interest rates and the decline in market transactions, new lending reached £48.6 billion last year, the third highest since Brexit. Refinancing accounted for 65% of the total and around half involved a change of lender.

Nicole Lux, Senior Research Fellow, Bayes Business School

“We are definitely seeing that large institutional borrowers are rushing to negotiate the best debt deals”, said Nicole Lux, Senior Research Fellow, Bayes Business School and lead author of the report. “As long as the income remains stable, new asset valuations are holding up and borrowers are negotiating their refinancing as early as possible”.

The strong business activity was also supported by an active secondary market, as 24% of new lending was syndicated or concluded as a participation. Hence the overall average loan size was £70 million, larger than in previous years.

The alternative lender segment, including insurance companies, now provides 31% of new loans.

“We are fortunate to have a very active and continually growing roster of non-bank lenders who are eager to step into any further dislocation”, said Chris Gow, Head of Debt & Structured Finance, CBRE. “There is no sign of a credit crunch in the UK”.

The report also found that debt funds dedicated 55% of their new lending to development projects, with lenders confirming their financing support for transitioning assets, carbon zero assets and assets with clear, improved ESG credentials.

Development lending made up 23% of new origination in 2022, showing a new increase in commercial development finance, which for the first time post-pandemic includes speculative development finance.

A number of lenders had an increase in loan covenant breaches and defaults: 42% of lenders have reported breaches and 47% have reported defaults across their loan book. In total, the average amount of loans in defaults reported was 3.5%, showing a further  increase since 2021 (2.9%).

With lending liquidity reduced, of the lenders that were still actively lending, LTVs were reduced and spreads increased. The average loan-to-value for a prime office loan is now 54.8%, while in 2021 it was still 56.8%. Similar movements were observed for all other property types.

 “Unsurprisingly, given the rapid change in the interest rate environment, the research reveals rising stress, particularly in the parts of the lending market,  like smaller challenger banks and especially debt funds, that serve higher risk real estate”, said Peter Cosmetatos, Chief Executive, CREFC Europe. “However, there is little to suggest widespread real estate-related problems in the financial sector. The market is diversely funded and has not experienced excessive exuberance this cycle, and leverage has remained at sensible levels”.