New Lending Is Down And Defaults Are Up As Rates Bite UK Debt Market

Bank vault

The volume of lending to UK property dropped sharply in the first half of the year and the proportion of loans in default increased as rising interest rates started to turn the screw in the UK debt market.

New lending to UK property totalled £18.6B in the first half of 2023, Bayes Business School’s Commercial Real Estate Lending report for midyear 2023 showed, 22% down on the same period in 2022. Of that new lending, about a third was for new deals, with the rest refinancing, as lenders and borrowers concentrated on existing loans. Normally the split is about 50-50.

Because of rising base rates, it is very difficult to finance loans at loan-to-value ratios of higher than 50%, the report says. That is because higher-LTV debt has a higher margin, and the income produced by properties at current yields is not sufficient to cover the interest that needs to be paid.

The rise in interest rates is also putting pressure on existing loans, the report says, as it is hard to refinance loans underwritten when base rates were below 1% now that rates are above 5%.

Bayes Business School found that the ratio of loans in default had risen from 3% to 4% between the end of 2022 and the middle of 2023, equating to £2.7B. A further £3.3B is in breach of loan covenants.

The Bayes report said small lenders are more likely to have loans in default than larger lenders, and debt funds have the highest concentration of defaulted loans at 11.2% of their overall loan portfolios. German lenders have the second-highest proportion at 5.5%.

Bayes said loan defaults are likely to increase over the coming months as loans come to maturity and interest rate hedges come to an end.

“Some asset values might have been near their fair value point, but lenders still have doubts about the right value as a base for lending and are therefore very conservative with their loan-to-value ratios,” Bayes senior research fellow Nicole Lux said in a statement.

“Looking ahead to the second half of the year, it is anticipated that further transactions and lending activities will occur. Some borrowers may no longer delay asset sales or loan restructuring, driving this expected increase in activity.”

Continue reading this story with a free account

Log in or register
Sign up for more articles like this
Subscribe to Bisnow's London Newsletters
Related Stories

Brookfield Veteran Departs To Become Pretium's Global Real Estate Lead

Willy Walker On The Risks And Sacrifices Behind Walker & Dunlop's Growth

BXP Lands Equity Partner For Madison Avenue Office Project

Landsec Shops For More Bluewater: The London Deal Sheet

Prologis Warns Higher Borrowing Costs Will Slow Industrial Deals, Development

Swedish Real Estate Giant To Buy Stockbridge For Up To $550M

Chicago Office Tower Sells For $550M To Zara Founder In Blockbuster Deal

CIM Sells Back Bay Garage Once Planned For 20-Story Condo Tower

Rents Smash Expectations At GPE

Brookfield-Backed Castlelake Dives Into CRE CLO Market With $1.1B Deal

Bond Traders Shift Bets Toward Rate Hike After Latest Inflation Data

2 Major H&R REIT Shareholders Plan To Vote To Block $5B Breakup