New lending for UK commercial real estate plummeted 33% to £32bn in 2023, the lowest level since 2013, according to Bayes Business School.

Bayes’ latest bi-annual research by Dr Nicole Lux shows that the decline in lending appetite affected all lender groups.

New development lending totalled £5.8bn, with 52% going to finance residential development. The overall development debt pipeline declined, and development lending accounted for only 16% of all new lending.

Some 30% of residential development finance came from small lenders with balance sheets under £1bn, which may be more at risk of ceasing business in the next three to five years or of merging with larger funds, the report noted.

Fewer than 10 lenders were willing to finance secondary retail assets or shopping centres, the report found. By contrast, 45 lenders were prepared to finance prime logistics assets and 43 to finance student housing, which are among the most attractive asset types for lenders, the report said.

Meanwhile, total outstanding debt is at its lowest level since 2017, at £170bn in 2023. Lux said the fall in outstanding debt was likely to stem from lenders not replacing repaid debt with new loans at the same pace. She suggested that this was probably due to low overall deal volumes in real estate equity markets, together with valuation uncertainties and discrepancies in debt transactions.

Lux said: “The UK lending market is becoming more binary, with borrowers sourcing their debt either from UK banks or debt funds. European banks are finding it increasingly difficult to provide funding due to ECB regulations and implementation of Basel IV rules, as well as unfavourable currency movements between sterling and euro funding costs.

“The share of international banks lending to commercial real estate in the UK has been falling since 2018. Historically, these banks provided 32-34% of financing, but their share dropped to an historical low of 25% last year.”

Nick Harris, head of UK and cross-border valuation at Savills, added: “The higher underlying cost of money in 2023 curtailed the viability of many commercial property transactions.

”Values in most sectors fell and the availability of stock to the market became restricted, which resulted in a decline in new loan origination compared with 12 months previously.”