UK RE lending rises 33pc in H1 as sentiment turns "bullish"

New lending to UK commercial real estate in the first half of 2025 has increased 33 per cent year on year to £22.3bn, according to new research.

The latest biannual report from Bayes Business School revealed that new lending has been driven primarily by increased development financing provided by private debt funds and by competitive bank lending, which has decreased loan margins, particularly for office and logistics assets.

“Lender sentiment has turned increasingly bullish, with 39 lenders indicating a preference for issuing loans exceeding £100m,” said Dr Nicole Lux at Bayes Business School, and author of the report.

The report found that development finance continues to be a large part of the market, accounting for 22 per cent of new lending and 19 per cent of total outstanding commercial real estate debt.

Debt funds have provided 57 per cent of commercial development finance, surpassing the amount of development debt supplied by banks, despite the latter also increasing their activity in the space by 20 per cent, the report explained.

Overall, debt funds provided 62 per cent of all speculative financing, 32 per cent of residential development funding and half of development finance for alternative asset classes.

For banks, the renewed sentiment towards commercial real estate has been influenced by a reduction in their defaulted loan books, with a 10–20 per cent decline achieved through 70 per cent loan refinancing and increased loan syndication, the report said.

Alongside this, UK banks are competing on pricing, which has driven down loan costs, with average spreads narrowing by 25–50 basis points (bps). UK banks have cut margins on prime office loans by 35 bps and UK debt funds by 33 bps.

Development loan pricing has also fallen, with margins narrowing by three to eight bps overall.

However, despite the progress in managing non-performing loans, the report stated that the overall default rate has risen to 6.3 per cent, primarily driven by debt funds, which reported a significantly higher default rate of 20.3 per cent, up from 15.2 per cent in December 2024.