UK real estate faces a wall of refinancing, as more than £70 bn of outstanding loans come due in the next 12 months.
According to the Bayes Business School's latest UK Commercial Real Estate Lending report, 42% of the £170 bn of loans outstanding are due for refinancing in the next 12 months (34% in 2024) leading to 'ongoing stress', says author Dr Nicole Lux.
The wave of maturing loans comes as lenders and borrowers are already dealing with existing defaulting debt, caused by falling values and rising debt costs.
The extent to which lenders have turned inwards is reflected in the total loan origination for 2023, the period covered by the survey. If found that new lending last year dropped 33% to £32 bn - the lowest in a decade and lower than in 2020 at the height of Covid. Only 28%, or £9 bn, was for new acquisitions rather than extensions or refinancings.
Ben Thomason, head of UK and EMEA debt advisory at Colliers, one of the reports sponsors, said: 'The findings highlights just how much the real estate market has been impacted by rising rates and the impact on servicing (existing loans), which resulted in exceptionally low transaction volumes last year.'
Savills head of UK and cross border valuation, Nick Harris, said the latest report showed that lenders had become 'increasingly inward focused'. On the plus side, he added, 'lenders have generally been supportive of their customer base, especially where there is debt interest cover.
'Loan extensions or restructuring were the preferred options rather than enforcing sales into a weaker market.'
This extend and pretend approach from lenders contributed to the record low transaction volumes last year, as assets that might otherwise have needed to be sold were not put up for sale.
Lux said all lender groups were affected by the decline in lending appetite. New lending by UK banks shrank by 14% and by 50% for non-bank lenders. Meanwhile international banks' share declined from a third historically to a quarter last year.
'The UK lending market is becoming more binary with borrowers sourcing their debt either from UK banks or from debt funds', she said. '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.'
However, Chris Gow, CBRE's head of finance (Europe) said he believed lenders' focus on prioritising extending or refinancing loans over new loan origination was an almost completed process. 'We have seen a strong recovery in lender liquidity so far in 2024.'
