New lending for UK commercial real estate rose 29% last year to reach the highest level in a decade, according to the Bayes Business School market survey.
The key barometer for the UK commercial property markets found some £52.7 billion in new loans were issued, with activity driven by non-bank lenders and UK banks. Their new lending was up 51% and 29% respectively.
But what Bayes describes as a "sluggish market" for new construction projects saw lenders competing on price to protect market share. Around 60% of lending involved refinancing, with nearly one-third of CRE loans refinanced during the year.
Bayes describes debt funds as “the clear winners” in this battle for new financing deals.
Dr Nicole Lux, senior research fellow at Bayes Business School’s real estate research centre, said that for generations UK banks were the dominant force in commercial real estate lending but last year their share of the market fell from 40 to 36%, continuing a long decline since the arrival of debt funds just over a decade ago.
“Debt funds were the clear winners in this process – increasing their market share from 12% to 28%. That surge means alternative lenders, including insurance companies, now hold 45% of outstanding CRE loans and seem set to break the 50% barrier over the next few years.”
Bayes says that for the first time its analysis used AI and open search tools to connect and support the report findings with transaction announcements.
Pricing heats up
The twice-yearly survey also reveals that increasingly competitive loan pricing saw British banks and debt funds cut rates for prime offices by 45 basis points and 30 basis points respectively. Other lenders followed suit, but they also competed through LTV levels and fees.
Junior loan margins, particularly for prime assets, fell by 45 to 55 basis points while outstanding commercial real estate loans rose just 0.8% year on year to stand at £174 billion. Bayes says lenders are clearly relying on refinancing to offset low transaction levels. It is estimated that around 19% (£33 billion) of loans will mature this year and require refinancing.
The period saw lenders reduce their defaulted loan book significantly – with such loans falling to 3.8%, compared with 6.3% in the middle of 2025, but still up on the long-term average of 3%.
Bayes says an estimated 15 to 20% of commercial real estate loans do not have covenants that would allow lenders to intervene before a loan default occurs, and additionally, interest coverage ratios remain stressed across loan portfolios. Thirteen percent of loans tested have a coverage of less than 1 times, compared with just 1% in 2016.
Development financing has emerged as a key growth area for lenders, accounting for 16% of new lending, up from 15% in 2024, and 19% of total outstanding commercial real estate debt.
The report finds that lenders are keenest to provide development finance on logistics and on residential and student housing, with most looking for loan ticket sizes above £20 million and for properties that are "climate-resilient" and which meet carbon reduction targets.
Bayes feels a difficult market may explain a growing concentration with the top 20 lenders accounting for 69% of the total market and originating 72% of loans.
Secondary lending, which is an important indicator of the health of the market, appears to be picking up with syndication deals reaching £14.7 billion.
In total Bayes finds 23 lenders were active in syndication, up from 18 in 2024, and 23 lenders (14 in 2024) recorded club deals and participations. International banks were by some distance the most active. UK banks only rarely participate although they do use some synthetic balance sheet securitisation.
The bi-annual report analyses £201 billion of debt tied to commercial real estate, with an additional £34 billion of social housing debt held by 11 lenders. Nearly half of the lenders are also active across Europe, reporting an additional £43 billion of European real estate debt.
But, the US-Iranian conflict and the failure of bridging lender MFS since the new year have dented more positive sentiment, according to Dr Lux.
Lux said in a statement: “The two- and five-year Sonia (Sterling Overnight Index Average) increased by 30 basis points at the start of the conflict in the Gulf at the end of February. That came days after the collapse of UK bridging lender MFS, which exacerbated existing concerns about the failure of auto-parts firm First Brands, subprime auto firm Tricolor and UK invoice-finance firm Stenn.
“These developments have focused attention on the risk of asset-based lending where there are loose risk monitoring standards and a lack of regulatory control and audit. Unsurprisingly, that anxiety has spread to the real estate lending sector.”
Risk exposure rising
Interest coverage ratios remain stressed across loan portfolios, Bayes says, with 13% receiving an ICR test result of below 1 times. Just 37 per cent have an ICR above 2 times, which is down from 73% in 2017. With the rise in interest rates, more than one-third (35%) of loans have now shifted to a level of 1.4x – 2.0x ICR, while another 15% are at 1.0x-1.4x, levels which Bayes points out risk payment defaults during the life of the loan.
Dr Lux explained: “This downward shift in ICR level is partially a natural result of higher interest rates but also resembles the period before the global financial crisis, when rates were also high and asset values inflated. It means a marginal issue of losing one tenant can result in a loan payment default.”
The research also highlights that lenders who financed retail or office assets in 2017 or 2018 were more likely to report loan losses. Loans taken out against retail properties were most at risk of losses over the last three years, Bayes found.
Sector and region differences
Prime office and industrial and logistics – at 86% and 85% – find the highest number of lenders willing to lend, despite lenders being "very selective with office deals" and overall lending volumes to the sector declining. Student housing and residential properties ranked third and fourth.
Regionally, loan exposures remain heavily concentrated on central London and the rest of South East England, with such loans totalling 64%. Lenders have been expanding allocation to outer London/M25 and the rest of South East England. North England is covered with 7.5% of loans and Scotland with 2.1%.
Securitisation and corporate bonds
The commercial mortgage-backed securitisation market has been picking up in Europe. CMBS pricing has become more competitive in response, Bayes says, with weighted average note margins reaching recent lows of plus 1.72% and plus 1.79% in the UK and Europe, respectively, for the latest transactions, according to Scope Ratings. The agency also reports that liability management remains an important factor, particularly for office loans. In 2026 four UK deals have been identified to mature.
Real estate companies active in the corporate bond market market reported a total of €28.07 billion of debt issued in 2025, of which only €1.4 billion was issued in the UK.
The response
Aparna Sehgal, a partner at Winston & Strawn London, said the data indicates a return of liquidity, which signals renewed lender confidence, and a modest uptick in acquisition activity, which reflects increased sponsor engagement. "The macro environment remains fragile though and it is therefore still open whether this data signals a sustained recovery in the CRE market, so it will be instructive to see where transaction volumes settle over the course of the year. That stakeholders across the capital stack remain focused on deployment will be helpful fuel for the CRE engine.”
Nick Harris, head of UK and cross-border valuation at Savills, added that while there had been a pick-up in transaction volumes during the year, refinancing activity once again dominated while the competition to finance good quality assets intensified further and, in general, lenders adjusted their loan pricing down.
“Clearly, since the time of the data covered by the survey, the lending market has encountered additional challenges but remains in a healthy position.”
Peter Cosmetatos, chief executive of the CREFC Europe network, said the overwhelming impression the report gives is of a stable market that is well-diversified in terms of both capital sources and property sectors.
"While we have been hearing anecdotal evidence of overheating, that is not really borne out in the data. Indeed, the lack of a meaningful market cycle over the last 10-12 years is striking."
Cosmetatos did say that what he terms the "persistent invisibility of back leverage" is a concern as it has become an important channel through which banks continue to support the sector, flattering the contribution of non-bank lenders. Back leverage enables debt fund lenders to borrow money from a third-party such as a traditional clearing bank to finance its loan to a borrower.
"It’s good to see some coverage of climate risk in the report, as this is an area that remains poorly understood despite the considerable financial risks it presents.”
John Hardie, senior director at CBRE, said the report captures a market that has shifted decisively in borrowers' favour.
"Origination at £52.7 billion is the strongest since 2015, prime office margins have compressed and day-one LTVs are back at 57-60%. But with 60% of activity tied to refinancing and £33 billion maturing in 2026, headline pricing only tells part of the story. Covenant flexibility, hedging strategy, and lender selection by sector and ticket size are where real value is now created or lost – particularly as Q1 2026 volatility reminds the market that the cost of capital can shift quickly.”
Bayes Business School (formerly Cass) is a global business school based in London. Its commercial real estate lending survey started life in 1997 and collects data directly from banks, insurance lenders and debt funds twice a year.