When Covid-19 and the associated lockdown initially hit the UK in early 2020 there were significant concerns that there would be wide ranging losses in the commercial real estate debt space. Mainstream banks moved quickly to provision heavily in response to such a scenario, but fortunately losses were largely avoided as lenders provided their clients with breathing space until the outlook improved.

However, with the threat of full lockdowns seemingly behind us and life returning to relative normality at the time of writing, we are starting to see a shift in strategy from some lenders in relation to assets that are still underperforming. While most were once willing to offer waiver after waiver, now their approach in certain circumstances is starting to harden. This can manifest itself by lenders looking to leverage their position by either refusing further waivers and extensions, asking for additional guarantees for sponsors, or even demanding full or partial repayment of the loan.

The good news for borrowers is that due to the diverse range of lenders active in the UK there are other options other than giving into the demands of an existing lender.

Many alternative lenders are actively offering refinancing solutions in these situations. While borrowing costs in such scenarios may increase compared to current arrangements, this may be preferable to a partial repayment of the loan as a new lender can craft a set of covenants that provide far more flexibility for the borrower to trade back up to pre-Covid-19 levels.

In some situations, we have even seen new lenders not only offering increased flexibility but also offering a higher loan amount than the existing facility, helping to maintain equity returns. The caveat is that this group of lenders tends to only provide a viable alternative for sponsor where existing debt is £20 million or above, but realistically this will cover a large number of the commercial real estate debt agreements in the UK.

The message we deliver to our clients is therefore to always try to create options by engaging with other lenders, particularly non-banks, that can both help you with negotiations with your incumbent lender and importantly provide a fall back as insurance if required.

Further information

Contact Charlie Bottomley

Read more: The increasing role of non-bank capital in financing real estate