The rise in interest rates in 2022 drove a 15 year high in refinancing in the UK, as borrowers scrambled to refinance ahead of further hikes.
According to the latest Bayes UK Commercial Real Estate Lending Year-end 2022 report, 65% of the £48.6 bn of new lending last year was as the result of refinancing. The 35% that was acquisition financing accounted for a lower share of lending than in any of the previous 15 years, and was largely the preserve of insurance companies, debt funds and overseas banks.
The surge in refinancing meant that – despite the drop in investment deals - overall new lending volume was relatively unchanged compared to the £49.8 bn lent in 2021, being a modest fall of -2%.
The report says the second half of 2022 ‘was dominated by the increase in interest rates, which has left many real estate investors worried about the incremental cost of financing. This resulted in increased refinancing activity in Q4 2022 and borrowers refinanced early rather than waiting longer in 2023, or extended loans out to 2024.’
Dr Nicole Lux, the report’s author, said: ‘We are definitely seeing that large institutional borrowers are rushing to negotiate the best debt deals.’
Euan Gatfield, head of EMEA CMBS and Loan Ratings at Fitch Ratings observed that around half the refinancings involved a change of lender, which is well above the norm.
Peter Cosmetatos, chief executive of CREFC Europe, said it was ‘unsurprising’ that another result of the rapid change in interest rates was rising stress, with the average amount of loans in default jumping from 2.9% in 2021 to 3.5% last year. Some 42% of the 81 lenders reported breaches and 47% reported defaults across their loan book.
Fitch believes that credit risk will be the dominant theme for lenders this year and next. Gatfield said: ‘Property values have already fallen quite a bit, banks are facing renewed scrutiny, office markets especially present considerable uncertainty, while typical five-year loans reaching maturity will have been shaped by looser standards of 2018 and 2019 origination.’
By contrast terms tightened in 2022; LTVs were reduced and spreads increased. The report found the average loan-to-value for a prime office loan is now 54.8% while in 2021 it was still 56.8%. Margins for prime offices crept up again to 2.7%, a 0.16% uptick, but the jump was higher for other asset classes. For example, for secondary industrial assets, margins shot up by 0.69% to 3.58%.
The steady march of alternative lenders continues, with this segment – mainly debt funds and insurance companies – now writing 31% of all new loans in the UK. In commercial development finance the change is even more startling, with debt funds alone providing 61% of the debt capital.
European bond issuance and securitisation markets were more or less closed for much of 2022; CMBS issuance crashed from €6.2 bn in 2021 to €1.5 bn in 2022.