The UK lending market recorded a decrease in lending in 2019 and is expected to experience an increase in lending costs and defaults this year due to the COVID-19 pandemic.

According to the Cass Business School UK Commercial Real Estate Lending Report, new loan origination in 2019 fell 12% to £43.8bn (€49.8) from £49.6bn the year earlier, in line with property investment volumes.

Defaulted loans – which rose by 36% year-on-year – are likely to affect lending secured on retail property, the report said, adding that “development loans are particularly expected to add to banks’ costs as they adapt to steadily rising capital requirements under the Basel framework”.

According to the report, the coronavirus pandemic will add to a range of challenges facing an already slowing market and further loan write-offs and debt losses for the retail sector of between £8bn and £10bn is expected.

An additional £22bn of development loans are affected by construction delays and defaults of construction contracts, with £14bn of residential development loans also potentially being partially written-off, the report stated.

Nicole Lux at Cass Business School and author of the report said while there was no evidence of lenders increasing costs to recover losses and write-offs after the crisis of 2008/09, the situation could now be different.

“The underlying credit decline of loans could immediately trigger increased capital costs where a recovery of a loan over the long-term is questionable. This then could result in higher lending margins.

“The effect of the coronavirus crisis will be most felt by the already struggling retail sector, but other sectors such as hotels and leisure, student housing and residential investment property will be greatly affected.”

Lux said while the change in capital treatment for interest on loans during coronavirus will offer short-term relief, “some businesses will not recover in the long term and the losses of these loans will need to be reflected in banks’ balance sheets”.

Peter Cosmetatos, CEO of the Commercial Real Estate Finance Council Europe, said: “2019 feels like a very long time ago – but this research is a timely reminder of where the UK commercial real estate finance market was before the pandemic struck.”

Cosmetatos said the £43bn of UK Common Real Estate debt requiring refinancing during 2020 and 2021 sounds more challenging in today’s conditions of economic lockdown and material valuation uncertainty than it would have done in normal times.

Paul Coates, head of debt and structured finance at CBRE Capital Advisors, said: “Once again the comprehensive Cass analysis provides an insight into the status of the market and confirms its relative stability and consistency over the recent past.

“The seismic impact of COVID-19 on the world, its economy and the CRE market is at its early stages and perhaps the 2019 report will act as a more even valuable baseline for how the market is impacted and importantly responds.”

Tom Brook, director debt and structured finance EMEA at JLL, said a key differentiator entering this crisis is the diversification in today’s lending markets as opposed to previous cycles.

“We expect that today’s balanced pool of lenders will help support liquidity and a better functioning credit market than in previous downturns.’

Michael Kavanau, head of debt and structured finance EMEA at JLL, said: ”Following the outbreak of COVID-19 we see an even greater emphasis from lenders on the three key pillars of the debt market – great assets, great sponsors and great economics. If you have these there is still liquidity in the market – in fact in the past two weeks we closed three such deals totalling more than £100m.”

Ian Malden, executive director at Savills, said the property, construction and lending markets have effectively stalled and servicing debt in some sectors will be put under severe strain.

”The Cass report is a timely reminder of how things were and therefore how well the lending market is positioned to face the challenges ahead.”

Ion Fletcher, director of finance policy, British Property Federation, said: ”Property owners are walking a tightrope, balancing support for tenants with their duties to the millions of pensioners invested in commercial property.

”The Government must urgently decide what more it can do to support tenants, property owners and lenders by either injecting cash into the system or ensuring lenders can continue to support borrowers.”

Neil Odom-Haslett, president of the Association of Property Lenders, said: “Lenders have been overwhelmed with requests. My feeling is June quarter rental payment date will be worse.

”This is not a short-term issue either. A number of commentators are saying lenders ‘should do more’, but at the end of the day there isn’t a magic money tree and lenders can’t simply write blank cheques and write off interest accruals and debt.”