Lending surges in UK commercial real estate market

New lending for commercial real estate in the first half of 2025 was 33 per cent up on the same period last year, the latest bi-annual report from Bayes Business School reveals.

Total new lending reached £22.3 billion, while secondary loan market syndication surpassed £10 billion, almost matching the full-year total for 2024. Banks have made significant progress in reducing their defaulted loan books, achieving a 10–20 per cent decline through 70 per cent of loan refinancing and increased loan syndication.

The report’s author, Dr Nicole Lux from Bayes Real Estate Research Centre, said: “Those steps renewed banks’ appetite for new lending, with loans now offered at highly competitive rates. Lender sentiment has turned increasingly bullish, with 39 lenders indicating a preference for issuing loans exceeding £100 million.”

There is particular enthusiasm for financing office and logistics assets, followed by student housing and residential properties.

Development financing has emerged as a key growth area, accounting for 22 per cent of new lending and 19 per cent of total outstanding commercial real estate debt. Currently, £31 billion in development loans are on lenders’ loan books – approaching the previous peak of £43 billion in 2007 – with an additional £24 billion in undrawn commitments.

Debt Funds see rise in default rate

Despite progress in managing non-performing loans, the overall default rate has risen to 6.3 per cent, primarily driven by Debt Funds, which reported a significantly higher default rate of 20.3 per cent (from 15.2% in Dec 2024). This sharp increase highlights both elevated risk in their portfolios and potential delays in their reporting compared to banks.

Loan pricing has become increasingly competitive. Fourteen lenders confirmed a reduction in senior loan margins across all investment property types and loan-to-value (LTV) levels, with average spreads narrowing by 25–50 basis points (bps). UK banks and Debt Funds have led this pricing shift, with UK banks cutting margins on prime office loans by 35bps and Debt Funds by 33bps (equivalent to a .33% rise in the interest rate).

As a result, loan margins for prime office assets have declined from 249bps to 231bps in just six months to June 2025. Prime logistics loans ended the period with an average margin of 233bps.

Development loan pricing also fell, with margins narrowing by 3–8bps overall. The most notable fall occurred in residential development financing. After remaining stubbornly high in previous years, margins have finally fallen below 500bps for the first time since 2020, averaging 474bps at a loan-to-cost (LTC) ratio of 63 per cent.

Debt Funds provided 62 per cent of all speculative financing, 32 per cent of residential development funding and half of development finance for alternative asset classes. In total they have provided 57 per cent of commercial development finance, surpassing the amount of development debt supplied by banks.

Bank revival gathers pace

But in the six months to the end of June 2025, banks increased their commercial development finance activity by 20 per cent.  UK Banks supply 56 per cent of all residential development finance and 28 per cent of all other commercial development finance in the market.

Neil Odom-Haslett, from the Association of Property Lenders, said: “Overseas lenders are keen to increase their exposures again – after taking a bit of a break. Banks, which now have excess capital, are competing aggressively on pricing, driving senior loan margins down by 25–50bps, particularly for prime office and logistics assets.

“Hopefully lenders will maintain lending discipline but growing evidence suggests covenant lite deals are becoming more prevalent as lenders chase deals. It is slightly concerning that the Debt Funds are showing default rates above 20 per cent.”

Peter Cosmetatos, chief executive of CREFC Europe, said:

“It is not easy to analyse a persistently constipated real estate market and an opaque, structured and layered financing market. However, it does seem clear that competitive lending activity is mostly focused on prime stock and more familiar asset classes, and on refinancing existing exposures."

Nick Harris, Head of Cross-Border Valuations at Savills, said: “The Bayes Survey shows that during the first half of 2025 the lending market has remained a highly liquid and competitive environment. Competition for the best assets remains intense, with lenders offering increasingly tight margins and with a greater focus on the larger loan sizes. The survey also highlights a notable increase in lending during the first half of the year, reflecting a focus from lenders on better performing secondary assets, which were out of favour last year.

“The lending industry has considerable capital to deploy, which bodes well for the anticipated increase in transactions for the remainder of the year and into 2026.”