New loans for commercial property reached £16.8 billion during the first half of 2024 and could beat last year’s figure of £32.7 billion if lending continues at the same pace during the remainder of the year, according to figures from the mid-year 2024 CRE Lending Research by Bayes Business School.
The figures, compiled by Nicole Lux, a senior research fellow at Bayes, find that new acquisitions accounted for 45% of loan origination during the first half compared with 28% for the whole of 2023. Lenders are still mostly busy refinancing their own loans or those of other lenders.
When compared with the first half of 2023, lending volumes were down 9.8% during the first six months of the year. UK banks were the most active lenders, accounting for £8.2 billion of new loans, followed by other international banks, having lent £4.1 billion, debt funds (£3.3 billion) and insurers (£1.2 billion). German banks were notably absent during the first half, with no recorded deals after lending £2.1 billion last year. Debt funds originated £5.2 billion of loans in 2023.
“The last couple of years has seen a pretty challenging environment for commercial real estate lending, as interest rates rose and both values and transactional activity fell,” said Neil Odom-Haslett, vice-president of the Association of Property Lenders in a statement. “However, the first half of 2024 saw some green shoots and value stability across most asset classes and the report shows that while some lenders are still taking stock of their portfolios, the UK banks came back strongly with new loans. With this added competition chasing fewer deals, it has driven margins down and LTVs up – which is good news for borrowers.”
Lux said in an email to CoStar News: “As this slow financing market is caused by low real estate transactions, we believe that unless real estate transactions pick up we will probably be just on par with 2023 lending volume by year-end 2024. There is lending appetite across all lenders.”
Loan margins for all asset classes continued to come down during the first half of the year in anticipation of lower interest rates.
At the end of July, the Bank of England cut interest rates to 5% after it was at 5.25% for months, the highest level in 16 years. The average senior loan margin for prime offices fell to 259 basis point during the first half compared with 275 basis points at the end of last year.
Financing residential real estate became marginally cheaper, with debt for average senior loans priced at 320 basis points compared with 325 basis points at the end of last year. International banks provided the cheapest debt for offices, charging 214 basis points, less than insurers (225 basis points) and UK banks and building societies (234 basis points).
“Looking ahead, the five-year SONIA Rate has compressed by approximately 100 basis points over the last 12 months and borrowers should therefore benefit from a liquid and competitive debt market when transaction levels pick up,” said Nick Harris, head of UK and cross-border valuations at Savills. “The position could potentially improve further if the Bank of England moves faster than anticipated in cutting borrowing rates.”
The chances of further interest rate cuts increased on Wednesday as new figures showed that UK inflation fell to 1.7%, below the Bank of England’s 2% target. The surprise drop was mainly caused by lower airfares and petrol prices.
Loan to values (LTVs) increased slightly but stayed below 60% for all asset classes, with the highest LTVs seen in the financing of residential investments (57.3%) and the lowest in prime retail (53.1%), according to the CRE Lending Research.
As with investors, lenders like beds and sheds. Residential accounted for 26% of loan books, up from 23% last year and industrial accounted for 14%, up from 13% from last year. Although unloved, offices still account for a large portion of loan books (23%), down from 26% in 2023. Retail accounts for 12% and hotel and leisure for 9% of loan books.