Lending in the commercial real estate market held up over the past year, but industry players have pointed to signs of “rising stress” as defaults slowly start to increase.
The Bayes UK Commercial Real Estate report for 2022 tracked £48.6bn of new lending, making it the third-busiest year since Brexit. Some two-thirds of activity was the result of refinancing, with a quarter of new lending syndicated or concluded as a participation. The latter development meant the average loan size was larger than in previous years, at £70m.
Nicole Lux, lead author and senior research fellow at Bayes Business School, said: “We are definitely seeing that large institutional borrowers are rushing to negotiate the best debt deals. As long as the income remains stable, new asset valuations are holding up and borrowers are negotiating their refinancing as early as possible.”
Some 42% of lenders have reported breaches and 47% have reported defaults. In total, the average amount of loans in default was 3.5%, an increase on 2021’s 2.9%.
Peter Cosmetatos, chief executive at CREFC Europe, said: “Unsurprisingly, given the rapid change in the interest rate environment, the research reveals rising stress, particularly in the parts of the lending market – like smaller challenger banks and especially debt funds – that serve higher risk real estate.”
However, he said there was “little to suggest widespread real estate-related problems in the financial sector”, adding: “The market is diversely funded and has not experienced excessive exuberance this cycle, and leverage has remained at sensible levels.”
In terms of sector appetite, Bayes noted that there were only 11 lenders quoting terms for secondary retail, nine of which were banks. By contrast, 40 quoted terms for prime offices. Margins for prime office loans moved out by 0.16% to 2.7%, and by 0.46% to 3.87% for secondary offices. The largest movement was seen for secondary industrial property, where loan margins moved by 0.69% to 3.58%.
Neil Odom-Haslett, president of the Association of Property Lenders, said: “The lending market has shown in the last few months it is able to pivot and adjust – however, the era of cheap and easy lending does seem to be over, certainly in the near term.”
Development lending accounted for almost a quarter of new origination, including a post-pandemic rise in speculative development finance. Debt funds supplied 61% of commercial development finance.
Refinancing activity picked up pace during the final quarter of the year as interest rates rose and borrowers looked either to refinance early or extend loans in to 2024. Euan Gatfield, head of EMEA CMBS and loan ratings at Fitch Ratings, said: “Around half of refinancing involved a change of lender, well above the norm. How much this reshuffling reflected divergence in lender risk appetite or balance sheet costs remains to be seen.”
Mark Manson-Bahr, global head of real estate finance at law firm Allen & Overy, said: “2022 was a year of two halves with greater stress in the market due to macroeconomic risks, inflation and realignment of global supply chains affecting deal volumes in H2.
“Real estate finance lenders are responding to this challenging environment to offer flexible credit solutions and certainty of execution, which continue to be prized by borrowers. Despite the retrenchment of some traditional lenders, increased activity from alternative credit providers looking to deploy capital will provide a competitive environment for borrowers seeking new financing or refinancing options in 2023.”
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