"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"
- Nick Harris - Savills
New lending for commercial real estate in the UK rose 33% in the first half of 2025 compared with the same period last year, according to the latest bi-annual report from Bayes Business School.
Total new lending reached £22.3 billion, while secondary loan market syndication surpassed £10 billion, nearly matching the full-year total for 2024. Banks have reduced their 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.”
There is particular enthusiasm for financing office and logistics assets, followed by student housing and residential properties.
Development financing has become a key growth area, representing 22% of new lending and 19% of total outstanding commercial real estate debt. Currently, £31 billion in development loans sit on lenders’ books, approaching the previous peak of £43 billion in 2007, alongside £24 billion in undrawn commitments.
Despite progress in managing non-performing loans, the overall default rate rose to 6.3%, primarily driven by Debt Funds, which reported a 20.3% default rate, up from 15.2% in December 2024. This increase highlights both higher risk in their portfolios and potential delays in reporting compared with banks.
Loan pricing has grown increasingly competitive. Fourteen lenders confirmed reductions 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 led this pricing shift, with UK banks cutting margins on prime office loans by 35bps and Debt Funds by 33bps.
As a result, loan margins for prime office assets fell from 249bps to 231bps in six months to June 2025. Prime logistics loans ended the period with an average margin of 233bps. Development loan pricing also declined, with margins narrowing by 3–8bps overall. Residential development financing saw the most notable drop, falling below 500bps for the first time since 2020 to an average of 474bps at a loan-to-cost (LTC) ratio of 63%.
Debt Funds provided 62% of all speculative financing, 32% of residential development funding, and half of development finance for alternative assets. Overall, they supplied 57% of commercial development finance, exceeding the amount provided by banks. However, banks increased their commercial development finance activity by 20% in the six months to June 2025. UK banks supply 56% of all residential development finance and 28% of all other commercial development finance.
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%.”
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.”
