Click here to Join the Movement to Display ‘Incarceration Nation’ on Billboards – Art Activism

Rush To Refinance Buoys UK Commercial Real Estate Lending But Stress Remains


New lending to real estate hit £48.6 billion last year, the third highest figures since the Brexit vote, and the trend is continuing despite a slowdown in investment transactions and increasing interest rates.

The Bayes UK Commercial Real Estate Year-End 2022 report, the key annual benchmark for financing in the industry, says 65% of this figure came from refinancing. The strong business activity was also supported by an active secondary market, with 24% of new lending syndicated or concluded as a participation. The overall average loan size was also larger than in previous years at £70 million.

Findings by Nicole Lux, lead author and senior research fellow at Bayes Business School (formerly Cass), show that the alternative lender segment, including insurance companies, now takes up 31% of new loans.

Debt funds dedicated 55% of their new lending to development projects, with lenders backing “transitioning” assets, carbon zero assets and assets with “clear, improved” environmental, social and governance 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 since the pandemic started 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 for secondary industrial property which moved by 0.69% to 3.58%.
  • Small to mid-size lenders price loans more expensively at 3.05%, than larger lenders at 2.31%. The pricing gap is even larger for secondary assets, such as secondary office, at 5.17% versus 2.75%.
  • Forty-two percent 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 the final quarter and borrowers refinanced early rather than waiting longer into 2023, or extending loans into 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.

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.”

Mark Manson-Bahr, Global Head of Real Estate Finance, Allen & Overy, said: “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.

“Lenders are demonstrating greater selectivity when granting loans. ESG and stewardship remain a core part of lenders’ activities, notwithstanding market challenges, and this is a trend we expect to continue to gain momentum in 2023.”

Chris Gow, Head of Debt & Structured Finance, CBRE said: “The report helps highlight similarities and differences between the UK and US debt markets. In both markets logistics and living remain the most favoured assets classes, smaller lenders have a greater percentage of loans in default and the significant year-on-year increase in the all-in-cost of debt has mainly been driven by higher reference rates. But there is no sign of a credit crunch in the UK. Banks are well capitalised, their liquidity remains strong and most continue to support borrowers and look for new origination opportunities, albeit at more conservative levels that before. We are also fortunate to have a very active and continually growing roster of non-bank Lenders who are eager to step into any further dislocation.”

Peter Cosmetatos, Chief Executive of 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, there is little to suggest widespread real estate-related problems in the financial sector. The market is diversely funded and has not experienced excessive exuberance this cycle, and leverage has remained at sensible levels.”

Euan Gatfield, Head of EMEA, commercial mortgage-backed securities and loan ratings, Fitch Ratings, said: “2022 lending volumes held up remarkably well given LTVs were reined in and loan interest rates spiked. However, acquisition financing accounted for a lower share of lending than in any of the previous 15 years, and was largely the preserve of insurance companies, debt funds and overseas banks.

“Also noteworthy is that 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. An interesting parallel is the question of how much the repricing of CMBS in 2022 reflected divergence in credit risk versus funding pressures facing some bond investors.

“Whatever lay behind those reallocations, we believe that for this and next year credit risk will be the dominant theme for lenders. Property values have already fallen quite a bit, banks are facing renewed scrutiny, office markets especially present considerable uncertainty, while typical five-year loans reaching maturity will have been shaped by looser standards of 2018 and 2019 origination.”

Sign up to receive the best Underground art & real estate news in your inbox everyday.

We don’t spam! Read our privacy policy for more info.

This post was originally published on this site