Lenders entered 2023 on a high, after high refinancing activity in Q4 2022

Bayes’ bi-annual real estate report shows that lending to real estate remained strong throughout 2022, reaching £48.6bn of new lending, still the third-strongest year post Brexit

The latest Bayes UK Commercial Real Estate Year-end 2022 report shows that despite the increase in interest rates in Q3 2022 and the decline in real estate market transactions, lenders continued to close new loans.

It does not come as a surprise that 65% was the result of refinancing. The strong business activity was also supported by an active secondary market, 24% of new lending was syndicated or concluded as a participation, hence overall average loan size was also larger than in previous years, with £70m average loan size.Dr Nicole Lux

Findings by Dr Nicole Lux [pictured], lead author and Senior Research Fellow at Bayes Business School (formerly Cass), show that the alternative lender segment including insurance companies now provide 31% of new loans.

Debt funds dedicated 55% of their new lending to development projects, with lenders confirming their financing support for transitioning assets, carbon zero assets and assets with clear, improved Environmental, Social and Governance (ESG) credentials.

Key highlights from the report, which covers data up to December 2022, also show:

  • Development lending made up 23% of new origination in 2022, showing a new increase in commercial development finance, which for the first time post pandemic includes speculative development finance.
  • Debt funds have taken on larger-scale asset transitioning projects, and supplied 61% of commercial development finance.
  • Margins for prime office loans have moved out by 0.16%, to 2.7%, but loan margins for secondary offices moved by 0.46%, to 3.87%. The largest movement was seen for secondary industrial property which moved by 0.69% to 3.58%.
  • Small to mid-size lenders price loans more expensively, 3.05%, than larger lenders, 2.31%. The pricing gap is even larger for secondary assets, such as secondary office, 5.17% versus 2.75%.
  • 42% of lenders have reported breaches and 47% have reported defaults across their loan book. In total, the average amount of loans in defaults reported was 3.5%, showing an increase again since 2021 (2.9%).

The second half of 2022 was dominated by the increase in interest rates, which has left many real estate investors worried about the incremental cost of financing. This resulted in increased refinancing activity in Q4 2022 and borrowers refinanced early rather than waiting longer in 2023, or extended loans in to 2024.

In addition to increasing lending margins, lenders also notably lowered the loan amounts on new loans. The average loan-to-value for a prime office loan is now 54.8%, while in 2021 it was still 56.8%. Similar movements were observed for all other property types.

Dr Lux 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.”

Neil Odom-Haslett, President, Association of Property Lenders, said:

“2022 turned out to be a year with a number of challenges, with unexpected events both nationally and internationally. As the Bayes report highlights, the world of real estate started the year strongly but as the year moved forward the impact of these events caused the market to react with valuation corrections and increased interest rates – it really was a year of contrasting halves.

"For the lenders it was a case of ‘battening down the hatches’ in H2 2022 and, as the report highlights, a number of lenders had an increase in loan covenant breaches and defaults. With lending liquidity reduced, of the lenders that were still actively lending, LTVs were reduced and spreads increased. The report also notes that certain asset classes are proving tricky to finance (e.g., secondary retail).

“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.”

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