The latest headlines coming out of the Commercial Real Estate Lending report from the Bayes Business School do not make for positive reading. The report outlined a significant decline in new lending for commercial real estate with figures hitting a 10-year low and new debt at its lowest level since 2017. To those in the industry, this does not come as a particular surprise. Uncertainty on valuation and a much higher interest rate environment have created a more challenging and cautious debt environment.
However, the decline in lending appetite hasn't been uniform across all lenders. While UK banks and lenders have been taking a precautionary approach due to the changing market dynamics, there's evidence to suggest alternative funders such as insurance companies are still active players in the market.
Contrary to the introductory storyline of decline, the continuity of the UK real estate finance market can be seen in its resilience and adaptability. While interest rates may remain high in the short term, market expectation is that interest rates and inflation will begin to fall in the second half of the year. In the meantime, lenders have been focusing on shoring up their loan books and working with sponsors to resolve covenant breaches, to avoid distressed sales.
We are also seeing green financing and higher sustainability standards to improve lending and investment. These are drawing a new generation of investors and developers that want to future-proof their portfolios. We anticipate that there will be continued demand for real estate debt as borrowers seek to refinance loans that are due to mature this year and many investors will need to navigate refinancing existing loans secured under different market conditions.
The UK real estate finance market has shown true grit, withstanding the shocks to the economy caused by the uncertainty surrounding Brexit and a global pandemic. Lenders have had to innovate and find new ways of working; and real estate investors from an increasingly complex array of backgrounds continue to find the sector attractive. Traditional sectors like retail and offices may face challenges, but there’s growing interest in alternative assets like data centres and student housing, indicating a shift in investment priorities.
While the lending market has encountered obstacles, these may act as catalysts for positive change. Sustained communication between borrowers and lenders remains pivotal as the market continues to evolve, paving the way for increased activity and opportunities in the year ahead.
https://www.egi.co.uk/news/new-real-estate-loans-plunge-to-decade-low/