After a sluggish start to 2024, U.K. commercial real estate (CRE) lending showed signs of recovery by year’s end, according to CoStar. New loan volumes rose 11% year-on-year, reaching £36.3 billion by December. This marked a turnaround after a record-low start to the year, when origination volumes were down 10% compared to early 2023.
The late-year rebound was partly fueled by two Bank of England rate cuts, which helped lower loan pricing and increase loan-to-value (LTV) ratios. Still, lenders faced rising defaults, with non-performing loans climbing from 4.9% to 5.9% in just six months.
Refinancing Dominates Lending Activity
About 38% of lending activity was linked to refinancing, while only 31% of new loans supported acquisitions. Internal refinancing and loan extensions were common, with £32.6 billion in loans now set to mature in 2025.
U.K. banks accounted for 46% of new lending, with international banks close behind at 31%. Debt funds contributed just 17% of loan activity. Lenders also syndicated £11.7 billion in loans, a noticeable uptick that may be tied to increased use of back-leverage structures.
Pricing Drops for Prime Assets
Intense competition led to lower margins for prime office and logistics loans, with average pricing falling by 25 and 17 basis points, respectively. Despite lower rates, high interest costs continue to pressure borrowers, especially on lower-yielding assets.
Margins for prime loans averaged below 300 basis points, with international banks offering the most competitive pricing and lowest fees. Development finance remained strong, with £32 billion in outstanding loans and £25 billion undrawn.
Sectors in Demand
Lenders showed strongest interest in prime offices, logistics, student housing, and residential projects. More than 80% of lenders were open to financing student housing and prime residential, but appetite dropped sharply for secondary and tertiary assets like shopping centres and data centres.
Outlook Cautiously Optimistic
While 2024 presented headwinds — from uncertain property values to rising defaults — lenders ramped up activity in the second half with more aggressive terms. Experts say these signs point to cautious optimism, though many remain focused on refinancing rather than new investment.
Despite volatility in early 2025, U.K. and international banks are expected to play an invaluable role in sustaining lending activity, particularly in high-quality sectors.
