“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”
– Peter Cosmetatos – CREFC Europe
UK commercial real estate lending surged in the first half of 2025, with new lending 33% higher than in the same period last year, according to Bayes Business School’s latest bi-annual report.
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 reduced defaulted loan books by 10–20% through 70% of loan refinancing and increased loan syndication.
Dr Nicole Lux, the report’s author, 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.”
The report noted strong interest in financing office and logistics assets, followed by student housing and residential properties.
Development loans accounted for 22% of new lending and 19% of total commercial real estate debt. Currently, £31 billion in development loans are on lenders’ books, approaching the £43 billion peak seen in 2007, with an additional £24 billion in undrawn commitments.
Despite improvements in non-performing loan management, the overall default rate rose to 6.3%, largely driven by Debt Funds, which reported a 20.3% default rate, up from 15.2% in December 2024. This increase reflects higher risk in their portfolios and potential reporting delays compared with banks.
Loan pricing has become increasingly competitive:
Fourteen lenders confirmed reductions in senior loan margins across investment property types and LTV levels, with spreads narrowing by 25–50bps.
UK banks cut prime office loan margins by 35bps, while Debt Funds reduced them by 33bps.
Prime office margins fell from 249bps to 231bps in six months, with prime logistics loans averaging 233bps.
Development loan margins dropped by 3–8bps overall, with residential development financing falling below 500bps for the first time since 2020, averaging 474bps at a 63% LTC ratio.
Debt Funds supplied 62% of speculative financing, 32% of residential development funding, and half of development finance for alternative assets. Overall, they provided 57% of commercial development finance, outpacing banks. However, banks increased commercial development lending by 20% in the first half of 2025 and now provide 56% of all residential development finance and 28% of other commercial development loans.
“Overseas lenders are keen to increase their exposures again – after taking a bit of a break,” comments Neil Odom-Haslett from the Association of Property Lenders. “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%.”
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.”