Commercial Real Estate - Market Update

In unsurprising news, both the FT and Evening Standard recently reported that investment in UK Commercial Real Estate fell to unprecedented lows in 2023 and Q1 of 2024.

In 2023 total loan origination was £33bn, the lowest in a decade and the proportion of those loans which were used to finance new acquisitions fell to the lowest since records began in 2007*. Deals over £100 million, which are fundamental for driving investment volumes, have suffered most during the downturn*.

The higher cost of borrowing has been the evident driver, allied with a market which was already in dilution post the pandemic. Furthermore, there is evidence that lenders are focusing their time and capital on trying to keep existing loans performing rather than originating new deals. The shift from extremely low debt costs to significantly higher interest rates has made it increasingly more difficult to finance deals and has stressed existing investments, as property values fall, and debt payments rise. 

The micro economy of the City has not been immune to this trend, with activity continuing to be subdued with only £520m transacting to date in 2024, which is 80% down on the 5 year average of £2.0Bn. Again, this is reflective of the lack of large transactions completing given the high cost of financing in the market.

The above being said, reports suggest that the current downturn has seen fewer distressed assets pushed on to the market by their lenders at fire sale prices. However, whilst lenders currently have less appetite to “push the button” on an appointment of a receiver when dealing with impaired loans, there are signs of increasing stress in loan books, with more breaches of loan covenants and a decline in the ratio of income to debt costs. The combination of the two is likely to mean that it will take longer for the market to reset and property values to increase, which may see lenders having no option but to move distressed assets from their balance sheet in the shorter term.

In the meantime, it is apparent that lenders are adopting a more conciliatory and consensual approach with borrowers in order to attempt to improve performance of loans or manage a cleaner exit. There remains a vast amount of capital available to be put into debt and at Moorfields we have seen a greater prevalence of borrowers being able to refinance or secure mezzanine funding.

The Moorfields, Real Estate team has extensive experience of working with lenders and sponsors to find solutions to remedy stressed Commercial Real Estate loans, which can include:

• Advising lenders and sponsors on consensual exit strategies and restructuring options.
• Assisting with refinancing solutions.
• Monitoring the progression of marketing and sales processes for lenders in collaboration with borrowers, to ensure an exit is expedited.
• Taking a formal Appointment as Receivers or Administrators, to take control of the asset whilst a sale/refinance or other restructuring is explored.

Source

* Financial Times - https://www.ft.com/content/664e2c02-5a54-4e95-aebe-0e35e8edf411

* Evening Standard - https://www.standard.co.uk/business/central-london-commercial-property-sector-rebound-savills-offices-investment-interest-rates-work-from-home-b1162036.html

* Oxford Economics

Author: Steve Sartin

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