New lending for commercial real estate in the first half of 2025 was 33% up on the same period last year, according to the latest six-monthly report from Bayes Business School.
Total new lending reached £22.3 billion, while secondary loan market syndication surpassed £10 billion, almost matching the full-year total for 2024. The investment market is still lagging, with 74% of new lending recorded to refinancing. However, there is hope that the rest of the year will improve further, Bayes writes.
The report finds that banks have made significant progress in reducing their defaulted loan books, achieving a 10 to 20% decline through 70% of loan refinancing and increased loan syndication.
An active secondary market is a good sign of financial health and Bayes reports that the market is finally providing more pricing stability for the syndication market to grow. In total 23 lenders were active in syndication (18 in 2024) and 22 lenders (14 in 2024) recorded club deals and participations.
The report’s author Nicole Lux said in a statement: “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, the report finds, followed by student housing and residential properties.
Prime office and industrial/logistics (88%) had the highest numbers of lenders willing to lend, despite the fact the lenders are very selective with office deals, and overall lending volumes to the sector are declining. A total of 60 lenders are offering finance for prime office deals, but this number drops to only 19 (28%) for secondary office properties, but 26 lenders would provide office development finance. Student housing and residential properties are ranking in fourth and fifth place in financing popularity.
Among secondary properties, logistic properties are most likely to be financed (54% of lenders), ranking in overall 10th place, followed by prime data centre and secondary residential. The final 12 ranks are all taken by secondary asset types, with secondary health care and secondary senior living schemes ranking last. When it comes to secondary assets or locations, financing options drop quickly to fewer than 20 lenders or 10 -15% of lenders.
Development financing is a key growth area, accounting for 22% of new lending and 19% of total outstanding commercial real estate debt. The report finds £31 billion in development loans are on lenders’ loan books – approaching the previous peak of £43 billion in 2007 – with an additional £24 billion in undrawn commitments.
Despite progress in managing non-performing loans, the overall default rate has risen to 6.3%, primarily driven by debt funds, which reported a significantly higher default rate of 20.3% (from 15.2% in December 2024). This sharp increase highlights both elevated risk in their portfolios and potential delays in their reporting compared with banks, Bayes suggested.
Loan pricing has become increasingly competitive. Fourteen lenders confirmed a reduction in senior loan margins across all investment property types and loan-to-value levels, with average spreads narrowing by 25–50 basis points. UK banks and debt funds have led the pricing shift, with UK banks cutting margins on prime office loans by 35 basis points and debt funds by 33 basis points.
As a result, loan margins for prime office assets have declined from 249bps to 231bps in just six months to June 2025. Prime logistics loans ended the period with an average margin of 233bps.
Development loan pricing also fell, with margins narrowing by 3–8bps overall. The most notable fall occurred in residential development financing. After remaining stubbornly high in previous years, margins have finally fallen below 500bps for the first time since 2020, averaging 474bps 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 have provided 57% of commercial development finance, surpassing the amount of development debt supplied by banks.
But in the six months to the end of June 2025, banks increased their commercial development finance activity by 20%. UK banks supply 56% of all residential development finance and 28% of all other commercial development finance in the market.
Neil Odom-Haslett, from the Association of Property Lenders, said that overseas lenders are keen to increase their exposures again, after "taking a bit of a break".
He added: "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 per cent.”
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.”
The bi-annual Bayes Commercial Real Estate Lending Survey is the key record of commercial real estate lending in the UK and is now in its 26th year. It is a continuous series started at De Montfort University with the support of a group of firms engaged in commercial real estate markets. A total of 71 lenders contributed to the mid-year 2025 data.