"While the pandemic accelerated the trend for more businesses to embrace hybrid working, it must have come as a shock to the office sector, as it’s ultimately businesses paying competitive rents that justify these construction projects"
- Jonathan Samuels - Octane Capital
New analysis from specialist property lending experts, Octane Capital, which compared lending levels across different areas of the property construction industry over the past decade using data from the Bank of England has revealed that the average monthly amount outstanding across the commercial construction lending sector has gradually fallen from £5.11bn in 2014 to £3.383bn in 2022, a drop of 34%.
Octane Capital estimates that 2023 will see this figure fall by a further -2.6% in 2023 to £3.30 billion, following on from an annual decline of -4.3% in 2022 and a minor reduction of -0.8% in 2021.
Rental recession and challenging year for retail
Last year office rentals in London were said to be in “rental recession” due to the number of empty workspaces, as the pandemic has facilitated a growing work-from-home and flexible working culture.
Meanwhile, the high street has struggled to compete with the growth of online retail for some time, while consumers are currently being squeezed by the cost of living crisis. In January the British Retail Consortium warned that retailers are set for a "challenging" year in 2024 due to “weak consumer confidence.
Overall construction lending dips for a second consecutive year
The analysis by Octane Capital also shows that lending across the construction sector as a whole is forecast to fall for a second consecutive year in 2023, as interest rate rises made borrowing gradually less affordable.
Octane Capital estimates that the average monthly total of outstanding lending will reach £33.26 billion in 2023, marking a -7.1% drop from the year before, while in 2022 there was also a drop, at -4.0%.
The second consecutive annual decline follows the Bank of England base rate hike from 0.25% to 5.25% between December 2021 and August 2023, making the cost of borrowing far more expensive for construction and development firms.
Development down but domestic construction sees uplift
Commercial lending for the development of buildings - which encompasses structural alterations, demolitions and rebuilding - has been on a steady decline since 2021.
Octane Capital estimates that some £12.74 billion of outstanding lending will be recorded in 2023, which will again result in a drop of -7.9%, following previous yearly falls of -5.3% in 2022 and -4.3% in 2021.
Lending for domestic construction - a dwelling where more than one family unit lives - is the only construction type expected to go against the grain.
After dropping off by -19.8% in 2021 it recovered by 9.2% in 2022 and is estimated to climb by 1.7% in 2023, as is forecast to sit at £6.04 billion for the year.
CEO of Octane Capital, Jonathan Samuels, commented: “Demand for commercial construction lending has seen a consistent decline in recent years, with the average monthly amount outstanding falling by 34% between 2014 and 2022 and expected to fall further in 2023.
“While the pandemic accelerated the trend for more businesses to embrace hybrid working, it must have come as a shock to the office sector, as it’s ultimately businesses paying competitive rents that justify these construction projects.
“Another factor hitting construction is the cost of financing, as it’s becoming harder for developers to make a good return on their investment given that interest rates are relatively high.
“One positive is that interest rates now look to be falling again, so it could become more affordable for developers to fund projects in 2024 and beyond, which should help cultivate some growth, albeit this will likely remain subdued versus historic highs.”
