New lending for U.K. commercial real estate climbed 33% in the first half of 2025 compared to the same period last year, reaching £22.3 billion, according to Bayes Business School’s latest bi-annual report.
Secondary loan market syndication also hit over £10 billion, nearly matching the entire volume recorded in 2024.
Despite this surge, 74% of new lending was tied to refinancing, reflecting a market still cautious about fresh investments. However, lenders’ appetite is growing, with 39 institutions indicating a preference for loans exceeding £100 million and more competitive pricing driving activity, according to CoStar.
Banks Reduce Defaulted Loans Amid Growing Syndication
Banks have notably reduced their defaulted loan books by 10 to 20%, thanks to extensive refinancing and increased syndication, signaling improving financial health.
An active secondary loan market — with 23 lenders involved in syndication, up from 18 last year — has also contributed to more pricing stability.
Prime Office and Logistics Lead Lending Activity
Lending remains most robust in prime office and industrial/logistics sectors, with 88% of lenders willing to finance these assets. However, lending volumes in offices continue to decline, with a sharp drop in willingness to fund secondary office properties (only 28% of lenders).
Student housing and residential assets are gaining traction but remain less prominent.
Development Finance Nears Historic Levels
Development finance is a major growth driver, accounting for 22% of new lending and nearly £31 billion of outstanding loans — approaching 2007’s peak.
Residential development loan margins have notably fallen below 5% for the first time since 2020, easing financing costs in that sector.
Debt Funds Lead Speculative Financing but Show Higher Default Rates
Debt funds now dominate speculative and development financing, providing 62% of speculative loans and 57% of all commercial development finance, surpassing banks.
However, debt funds exhibit a worrying default rate of 20.3%, substantially higher than the overall 6.3% default rate and pointing to elevated risk.
Loan Pricing Tightens Amid Increased Competition
Loan pricing has tightened significantly, with senior loan margins on prime office assets dropping from 249 to 231 basis points in six months. U.K. banks and debt funds are leading margin compression, especially on prime office and logistics loans.
Outlook: Growing Competition and Cautious Optimism
The report suggests growing competition among lenders but also warns of increasing covenant-lite deals, which may raise risk. Overseas lenders are returning to the market, adding further capital and fueling competition.
Market experts agree the lending environment remains competitive and liquid, with lenders focusing on prime assets and better-performing secondary properties. The plentiful capital available bodes well for increased transaction activity through the rest of 2025 and into 2026.
