UK Loans In Breach Or Default Top £7B

The volume of UK real estate loans in default or in breach of covenants reached £7.3B at the start of the second half of the year as elevated interest rates continued to put pressure on borrowers. 

Some £3.7B of loans were in default and a further £3.6B in breach, according to the Bayes Business School’s Mid-Year 2024 Commercial Real Estate Lending Report.

That default figure equates to 4.9% of all outstanding UK real estate loans — up from 4% at the end of 2023 but still well short of the 2010 peak, when 25% of all UK real estate loans were in default.

Loans not being repaid at maturity was the most common reason for default, Bayes said. 

There is a significant spread among lenders when it comes to where loan defaults lie. While only around 3% of loans underwritten by banks are in default, that figure climbs to 14% for debt funds. 

The same pattern can be seen in regard to the size of lenders. Just 2% of loans at larger lenders are in default, likely because they typically underwrite debt to higher-quality properties. Meanwhile, 10% of loans at smaller lenders are in default, as to win business, they tend to write riskier loans on worse assets.

While falling interest rates are helping borrowers refinance, there is still something of a mismatch in the market, putting pressure on existing leveraged owners. There is £57B of debt coming to maturity in 2024, but only £16.7B of new loans were underwritten in the first half, 10% down on the same period last year. 

Extrapolated out over a whole year, almost £25B less debt would be extended than loans coming to maturity. So far, the gap is mostly being filled by equity, Bayes said.

The good news for borrowers on new deals is that lenders are cutting loan pricing to win business in a market where few transactions are ongoing. 

“This updated research reveals another difficult start to the year for lenders,” Bayes Business School senior research fellow Nicole Lux said in a statement.

“They are competing fiercely for financing opportunities due to low transaction volumes in the UK commercial real estate market. This continues the trend that started with Brexit in January 2020 and the significant impact of events such as the covid pandemic.”