UK commercial real estate lending showed the first signs of recovery towards the end of a “difficult” year for lenders.
The latest Bayes Business School report found new loan volumes rose by 11% to £36.3bn over the course of 2024, driven by a marked upturn over the final quarter of the year.
“Last year was difficult for CRE lenders, who had to deal with continued market value uncertainties, existing non-performing loans and a surge of loan repayments, while generating new business,” said report author Nicole Lux, senior research fellow at Bayes Business School.
“However, lenders intensified their efforts to increase lending volumes during the second half of the year with new loan pricing cuts and increased loan-to-value ratios.”
Defaults climbing
Some 38% of new lending was funded through internal refinancing, while 10% of loans that had already matured in 2024 were extended, leaving roughly £32.6bn of loans expected to mature in 2025.
UK banks accounted for 46% of new loans, with international banks – particularly those with branches in London – providing 31%. Debt funds accounted for 17% of new lending.
John Hardie, a senior director in CBRE’s debt and structured finance team, said: “Lender competition has driven significant margin compression, particularly for prime assets, creating opportunities – but also complexities – for borrowers navigating refinancing.
“With 38% of lending activity linked to refinancing and a wide divergence in terms across lender types, a deep understanding of market dynamics, lender appetite and evolving credit conditions is essential. In today’s environment, informed decision-making and thoughtful structuring can unlock real value beyond headline rates.”
Default loans on lenders’ books rose from 4.9% to 5.9% in just six months.
“Given the challenging macroenvironment it’s not surprising there was an increase in non-performing loans but the report does show that lenders are still disciplined in their underwriting,” said Neil Odom-Haslett, president of the Association of Property Lenders.
“For alternate lenders, the emergence of back leverage, which was in most cases always there, became more visible and seems to be generally accepted. Overall, 2024 was challenging, and the hoped for green shoots are taking a little longer to emerge.”
Loan pricing fell by 25 basis points for prime office loans and 17bps for prime logistic loans. Pricing for secondary logistic assets and for secondary office loans fell by 51bps and 37bps respectively.
“The underlying cost of finance for borrowers remains relatively high and yields in some sectors are not compressing, partly due to the lack of transactional activity,” said Nick Harris, head of UK and cross-border valuation at Savills. “If the underlying cost of finance were to become cheaper, this should create a virtuous circle, triggering a more active transactional market and capital growth.”
Diverse supply
The total outstanding development loans on lenders’ loan books sit at a long-term high of £32bn, with a further £25bn available but undrawn. But new development lending slowed in the final quarter, with the sector’s share of new loan volume dropping to 15%.
Debt funds provided a little over half of all speculative development financing, 36% of residential development funding and 64% of development finance for alternative asset classes. International banks boosted activity, providing 36% of all speculative development finance.
UK banks supplied 56% of residential development finance and 28% of all other commercial development finance, remaining the strongest lender in all regional markets.
Peter Cosmetatos, chief executive of CREFC Europe, said: “What does seem clear, both from the research and anecdotally since the year-end, is that the UK CRE financing market is diversely funded, resilient and well-functioning, even in these highly uncertain and persistently challenging conditions.”
Image © Pete Linforth/Pixabay
Send feedback to Tim Burke
Follow Estates Gazette
