Lenders Expect 2024 To Be The Year Distressed Sales Start In Earnest

The pressure on lenders and borrowers to deal with problem loans is ratcheting up, and 2024 will see a significant uptick in distressed sales. 

That was the verdict of a panel of lenders speaking at Bisnow’s Real Estate Outlook event in London, held at the Royal Institution of Great Britain.

Consensual sales will come first as loans that need to be refinanced can’t be, due to higher interest rates, panellists said. Then things will start to get more acrimonious. 

“You’re going to see more consensual sales in the first half of next year,” Nuveen Head of Debt Capital Markets EU and APAC Farrah Brown said. “Lenders have tried to weather the storm but are coming under increased pressure from regulators to deal with problems. Regulators are asking lenders to call for valuations, and that will start moving the market.”

Loan default levels among UK lenders were about 3% of total loans at the end of 2022, data from Bayes Business School showed, broadly in line with long-term averages. 

But interest rates have continued to rise since then, and in recent months, both the Bank of England and European Central Bank have flagged commercial real estate lending as an area to watch for systemic risk.

2024 is likely to be a tough year for refinancing, as 20% of the £177B of outstanding UK property debt is due for refinancing next year, or about £35B.

Loans coming to maturity now were likely underwritten during the period from 2017 to 2021 when interest rates were at historic lows. In many cases, there is not enough income from properties to refinance debt at base rates of 5% when loans were originally underwritten at base rates of 1%. 

“Lenders are saying to borrowers, ‘Put it on the market or we will enforce,’” Birchwood Real Estate Capital CEO Lorna Brown said. “We’re already starting to see the number of exits ticking up.”

LaSalle Investment Management Head of Real Estate Debt Strategies David White said the firm was seeing a global “€1.6T wall of maturities” over the next few years that would inexorably lead to sales. 

“It’s inevitable that we will see distressed assets handed back and some pretty nasty nonconsensual restructurings coming through,” White said. 

Bisnow has identified more than £1B of UK assets that have been foreclosed on by lenders and are on the market. 

White said that his team analysed about £15B to £20B of loan opportunities per quarter, and 80% of what is passing over their desks right now are refinancings rather than new acquisitions. But lenders do not want to refinance another organisation’s existing loans unless borrowers are willing to put in more equity, take a write-down on the value or put a structure like a profit share into place. 

Memery Crystal partner and Head of Banking and Finance Matthew Lindsay said his team was seeing borrowers using mezzanine loans to bridge the gap between the amount of debt senior lenders were willing to provide and the original equity in the deal. In many cases, there wasn’t enough income from assets to pay the higher interest rate commanded by mezzanine debt, so interest was being rolled up and deferred to a later date in the hope that values and income improve. 

In terms of refinancing the loans of other organisations, Nuveen’s Brown said that borrowers asking for a short-term refinancing was a “red flag,” the short-term nature of the extension suggesting they were in a difficult spot and just trying to buy time. 

In terms of the type of deals that lenders are looking to finance, panellists cited the living sectors as being particularly attractive due to the strong growth rented residential is seeing. 

Nuveen’s Brown said lenders are also trying to rebalance their loan portfolios to include more loans in growing sectors like self-storage. 

“As a lender, you have to look at your basis, look at the fundamentals of the real estate you’re lending against,” she said. “The living sector is where the equity wants to play, and debt goes where the equity goes.”

Birchwood’s Brown said the firm is willing to lend on offices, but it has to be the best assets in the best locations. And in spite of the fact that the market is in a state of flux, there are good deals to be done by lenders, she said.