If You’re After Distress In UK Real Estate, Look At Smaller Lenders
The level of distress among UK real estate lenders ticked up only slightly in 2023, according to the leading researcher on real estate debt — but there is a big difference between larger and smaller lenders when it comes to soured loans.
The proportion of UK loans in default rose from 3.5% at the end of 2022 to 3.9% at the end of 2023, according to the Commercial Real Estate Lending Report from Bayes Business School. That is despite the fact that rising interest rates caused transaction levels and values for UK real estate to drop sharply, particularly in the office sector.
The analysis covers 71 lenders with £170B of outstanding loans. It tracked about £6.6B of UK real estate loans in default.
“Some lenders are more assertively protecting their positions on defaulted loans. While enforcement rates are increasing, they remain very low overall,” CBRE Head of Finance and Structured Debt for Europe Chris Gow said of the results in a statement. “Combined with amend & extend strategies deployed by many lenders, we believe the bulk of short term maturities will be solved over a period in excess of 12 months.”
The overall level of defaults is low, particularly compared to the 2008 financial crisis, when about a quarter of all loans were in default or in breach of covenants. But there are differences between types of lenders.
For larger lenders with loan portfolios of £5B or more, the default level was 1.5%. But for smaller lenders with loan books of £1B or less, that figure rises to 7.5%.
The same trend is seen in interest cover ratios, the ratio by which income from a property exceeds the interest payable on the loan. For larger lenders, 61% of their loans have an ICR of 2x or more, but smaller lenders have just 24% at that level.
2024 is a big and potentially problematic year for lenders, with 20% of outstanding loans maturing this year and 19% maturing next year.
In terms of new lending, the £32B extended for new deals and refinancing in 2023 was the lowest figure for a decade, largely because of low investment volumes, as international banks have mostly exited the market for the time being.
“The UK lending market is becoming more binary, with borrowers sourcing their debt either from UK banks or from debt funds,” Bayes Business School senior research fellow Nicole Lux said in a statement. “European banks are finding it increasingly difficult to provide funding due to ECB regulations and implementation of Basel IV rules, as well as unfavourable currency movements between sterling and euro funding costs.”
