Lenders have become more confident in the UK commercial property market, with new lending for commercial real estate up 33% in H1 2025 compared to last year, research from Bayes Business School found.
Total new lending hit £22.3bn, and secondary loan market syndication passed £10bn, nearly matching the total for 2024.
Banks cut their defaulted loan books by 10–20%, mainly through refinancing and syndication.
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.”
Office and logistics assets saw the most interest, followed by student housing and residential property.
Development financing made up 22% of new lending and 19% of total commercial real estate debt.
£31bn in development loans are currently on lenders’ books, close to the previous high of £43bn in 2007, with another £24bn in undrawn commitments.
Loan defaults have risen to 6.3% overall, led by Debt Funds, which reported a default rate of 20.3%, up from 15.2% at the end of 2024.
This points to higher risk in their portfolios and possible reporting delays, according to data.
14 lenders said they have cut senior loan margins across all property types and loan-to-value (LTV) levels, with spreads narrowing by 0.25% to 0.50%.
UK banks and Debt Funds led the way, with UK banks lowering margins on prime office loans by 35 basis points and Debt Funds by 0.33%.
Loan margins for prime office assets dropped from 249 to 231 basis points in six months to June 2025.
Prime logistics loans finished the period at 233 basis points.
Development loan pricing also dropped, with margins narrowing by 3–8 basis points.
Residential development loan margins fell below 500 basis points for the first time since 2020, averaging 474 basis points at a loan-to-cost ratio of 63%.
Debt Funds provided 62% of all speculative financing, 32% of residential development funding, and half of development finance for alternative asset classes.
In total, they supplied 57% of commercial development finance, overtaking banks.
Banks increased their commercial development finance activity by 20% in the six months to June 2025.
UK banks now provide 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.”
Odom-Haslett added: “It is slightly concerning that the Debt Funds are showing default rates above 20 per cent.”
Peter Cosmetatos, CEO 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.”
Harris added: “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.”
