Bayes report: new lending for CRE down 10% in the last year

New lending for commercial real estate in the UK fell by nearly 10% over the last year, continuing a downward trend, according to Bayes Business School’s latest bi-annual report, which was published yesterday. CRE loan volumes were down by 9.8% y-oy in the 12 months to 30 June 2024, reaching £16.7 billion.

“This updated research reveals another difficult start to the year for lenders”, said Nicole Lux, Senior Research Fellow, Bayes Business School and lead author of the report. “They are competing fiercely for financing opportunities due to low transaction volumes in the UK commercial real estate market.”

This continues the trend that started with Brexit in January 2020 and the significant impact of events such as the Covid pandemic.

“While international and UK banks have lost market share over recent years, the undoubted winners are debt funds, which have seen their loan book market share nearly double, rising from 12% to 23%”, Lux said. “When insurance companies are included, alternative lenders now hold 43% of outstanding CRE loans.”

At year-end 2023 the research identified 34% of loans, valued at £57bn, maturing in 2024. With only £16.7bn of new lending to replace these loans during the first six months, outstanding loan books have already experienced a decline of 5%.

The report also finds that development finance hit a new peak, with £28.8bn of outstanding development finance and another £25.5bn ‘dry powder’ in undrawn financing facilities. UK clearing and regional banks are largely driving development lending.

As for international banking, activity in direct CRE lending has been declining since Brexit, falling from 33% in 2018 to only 21% by June 2024. In the same period, their share of new lending has declined from 30% to 25%.

Interest in financing prime office and industrial properties remains strong, with more than seven out of ten lenders expressing a willingness to finance these assets. The two key assets that lenders provide development finance for are residential (provided by 49%) and student housing (46%).

The situation is not favourable for those seeking refinancing with current loan breaches and defaults. Loan credit quality is still under pressure, and the average default rate is close to 5% across lenders’ loans books, with 9.8% of loan facilities experiencing problems such as covenant breaches.

This is particularly the case for smaller institutions with balance sheets or assets under management of less than £1bn worth of loans. These institutions, regardless of whether they are banks or debt funds, lack the economies of scale needed to lend to higher quality assets.

“H1 was a strong half for the non-bank lenders who were able to step in to refinance many of the loans the UK and international banks were either unable to renew or simply write”, said Ben Thomason, Director & Head of Debt Advisory at Colliers International.  “We expect to see some rebalancing of this in H2 as the forward curve softens and stronger sentiment returns to the market more generally. Development finance has led the way in the ‘beds and sheds’ sector and we expect to soon see more activity within the office and retail sectors towards the year end and into Q1 2025.”