New lending for commercial real estate (CRE) fell 9.8% year-on-year in the 12 months to the end of June, reaching £16.7bn, according to Bayes Business School’s latest bi-annual report.

At the end of last year, Bayes identified 34% of loans valued at £57bn set to mature in 2024. With only £16.7bn of new lending to replace these loans during the first six months, outstanding loan books have already fallen by 5%, it warned.

Meanwhile, more than seven out of 10 lenders expressed a willingness to finance prime office and industrial properties, Bayes said.

According to the report, development financing margins have compressed by 44bps to 414bps for pre-let commercial developments. For residential development, margins have compressed by 68bps.

The cost of speculative financing has dipped by 4bps to 477bps. For prime commercial and residential developments, the average loan-to-cost of debt is 62%.

While loan financing terms for borrowers have generally improved, the report highlighted less favourable terms for those seeking to refinance loan with breaches or defaults. The average default rate is close to 5% across lenders’ loans books, with 9.8% of loan facilities experiencing problems such as covenant breaches, Bayes reported.

This is particularly the case for smaller lenders with balance sheets or assets under management of less than £1bn worth of loans, it said. These institutions lack the economies of scale needed to lend to higher-quality assets.

Nicole Lux, senior research fellow at Bayes, said: “This updated research reveals another difficult start to the year for lenders. They are competing fiercely for financing opportunities due to low transaction volumes in the UK commercial real estate market. This continues the trend that started with Brexit in January 2020 and the significant impact of events such as the Covid pandemic.

“While international and UK banks have lost market share over recent years, the undoubted winners are debt funds, which have seen their loan book market share nearly double, rising from 12% to 23%. When insurance companies are included, alternative lenders now hold 43% of outstanding CRE loans.”

According to industry experts, borrowers are turning to mezzanine finance to help fill a funding gap left by banks’ more cautious lending stance in recent years.