UK lending in the commercial real estate market reached the lowest levels seen in a decade in the 12 months to December 2023, according to the recent bi-annual Bayes Commercial Real Estate Lending Survey. All types of lender – whether high street banks, challenger banks or debt funds – advanced significantly less financing, with total new loans reaching just £33bn, which is down on previous years.  

The drivers for such a historic low seem to be varied. The FT notes that interest rates increased while property prices fell, making financing new property acquisitions unattractive and putting pressure on existing debt payments. Data from the Bayes’ report shows that lenders heavily prioritised refinancing or amend and extends over new lending for acquisitions being prepared, in some cases, to do so notwithstanding outstanding covenant breaches (presumably provided there was sufficient debt interest cover). Asset quality remains a concern, with a significant spread in the loan pricing available across asset classes.

Looking ahead, the Bayes’ report notes that 42% of the £170bn of outstanding commercial real estate loans is due to be refinanced within the next 12 months. We expect to see the continued use of amend and extend structures, with investors remaining under continued pressure to increase the proportion of equity (whether through existing equity cure mechanics or through further cash injections at the point of extension) to reduce leverage and thereby secure better interest rates or other more favourable terms. More broadly, the market will be looking to continued falling inflation rates to result in a cut to interest rates, which should in turn ease pressure on debt coverage.