New lending for UK commercial real estate showed the first signs of recovery at the end of 2024, according to Bayes Business School’s bi-annual report.

New loan volumes increased by 11% year-on-year in the 12 months to 31 December 2024, reaching £36.3 billion, according to the key report for the UK commercial real estate lending market. The figure represented the first signs of a turnaround with the first six months of the year having seen investment volumes hit a record low and loan origination volumes at £16.2 billion, 10% below the first half of 2023. Lending to new acquisitions took a 31% share of the overall figure for the year in the end.

Most of the recovery was due to stronger lending activity during the final quarter of 2024. Bayes says the two base rate cuts during the second half of 2024 might have been one factor for the increased loan origination and recovery. Nevertheless, the default loans on lenders’ books rose from 4.9% to 5.9% in just six months.

The bi-annual CRE Lending Reports are researched and written by Nicole Lux, senior research fellow at Bayes Business School, part of City St George’s University of London.

Lux said that last year was difficult for CRE lenders as they had to deal with continued market value uncertainties, existing non-performing loans and a surge of loan repayments, while generating new business.

But Lux said lenders intensified their efforts to increase lending volumes during the second half of the year with new loan pricing cuts, and increased loan-to-value ratios.

The year-end 2023 report highlighted that 34% of loans, valued at £57 billion, were due to mature in 2024. Data analysis for the report shows that 38% of new lending was funded through internal refinancing, while approximately 10% of loans that had already matured in 2024 were extended. That means £32.6 billion of loans are expected to mature in 2025.

UK banks accounted for 46% of new loans during 2024, with international banks, particularly those with branches in London, providing 31%. The international banks with London branches were particularly active in the second half of 2024. Debt funds were quieter, contributing 17% of new lending.

Bayes also highlighted a change for the loan syndication and participation market, with 30 active lenders syndicating £11.7 billion last year.

Lux said: “It is difficult to identify the loan volumes provided through back-leverage facilities, but the noticeable increase in syndication volume reported by bank lenders could be related to those facilities.”

She also highlighted that while lenders continued to increase their new lending last year, non-performing loans on lenders’ books also rose, with the default rate reaching 5.9%, up from 4.9% in only six months.

Loan-to-value ratios for new prime office loans rose from 53% to 55% last year, and from 54% to 56% for prime logistics loans.

Intense competition for lending to prime assets has led to loan margins against office financing dropping to 249 basis points (from 259 basis points), reports Bayes, in just six months to June 2024.

Prime logistics financing ended at an average of 250 basis points, while student housing investment financing is available at an average of 285 basis points. These margins are comparable across asset classes for an average of 55% to 60% loan to value. Due to the lack of prime product, loan margins for secondary logistics assets have dropped to 314 basis points, a drop of 51 basis points over 12 months.

Loan pricing fell by 25 basis points over the year for prime office loans and 17 basis points for prime logistic loans. The lowest pricing for prime logistics loans started from 150 basis points. Secondary office loans fell by 37 basis points. Despite the rate cuts and loan pricing decline, overall financing rates remain high compared to the net income yields of prime property.

Bayes says that against prime office assets all lenders offer loan margins below 300 basis points, for an average 55% to 60% LTV. UK banks reach an average of 297 basis points compared to debt funds with 285 basis points. Average pricing levels for international banks are below 200 basis points. When it comes to additional arrangement fees, international banks are also the most competitive with an average fee below 100 basis points, together with insurance companies. UK banks tend to charge higher additional fees.  

Bayes said the development finance market has contributed strongly to the lending market. The total outstanding development loans on lenders’ books are at a long-term high of £32 billion, with a further £25 billion available but undrawn. New development lending slowed in the final quarter of 2024, which meant the sector’s share of new loan volume fell to 15%.

Development finance pricing was also under pressure with margins for partially let commercial office development contracting by 84 basis points. Rates for speculative financing fell by 60 basis points.

Debt funds provided 52% of all speculative development financing, 36% of residential development funding and 64% of development finance for alternative asset classes. International banks boosted their activity, providing 36% of all speculative development finance, but their targeted projects are mostly concentrated in London office schemes.

UK banks supplied 56% of all residential development finance and 28% of all other commercial development finance. They also remain the strongest lender in all regional markets. The regional markets are well covered by UK retail banks, which lend 65% in the regions.

Bayes says that despite lenders offering more competitive loan terms in 2024, moving loan to value levels upwards, margins downwards and lowering interest coverage ratio covenants, for many borrowers interest payments are still leaving limited access to cash flow in existing assets. It says better coverage is achieved for repriced high yielding assets.

John Hardie, CBRE senior director (debt and structured finance), said: “The 2024 Bayes CRE Lending Report highlights how lender competition has driven significant margin compression, particularly for prime assets, creating opportunities – but also complexities – for borrowers navigating refinancing.

“With 38% of lending activity linked to refinancing and a wide divergence in terms across lender types, a deep understanding of market dynamics, lender appetite and evolving credit conditions is essential. In today’s environment, informed decision-making and thoughtful structuring can unlock real value beyond headline rates.”

Neil Odom-Haslett, president of the Association of Property Lenders, said there were many challenges throughout 2024, including muted investment levels, and the full-year report followed the findings of the H1 2024 report and what lenders are seeing. "For the best-in-class assets in the favoured sectors, there is plenty of liquidity and competition. LTVs have increased and spreads compressed and some lenders who were less active in 2022 and 2023 have returned. For those assets which are secondary and/or tertiary financing it is trickier – with pricing moving out."

Odom-Haslett adds that given the challenging macroenvironment it is not surprising that there was an increase in non-performing loans but the report does show that lenders are still disciplined in their underwriting. "For alternate lenders, the emergence of back leverage, which was in most cases always there, became more visible and seems to be generally accepted. Overall, 2024 was challenging, and the hoped for green shoots are taking a little longer to emerge."

In terms of assets and sectors that lenders are keen to lend against, prime office and industrial/logistics (87%) find 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 53 lenders are offering finance for prime office deals, but this number drops to 16 (26%) for secondary office properties. Twenty-five lenders would provide office development finance. Among secondary properties, logistics properties are most likely to be financed (61% of lenders), while secondary shopping centres, data centres and healthcare properties are the most difficult to finance (eight lenders). Student housing assets are the third most attractive sector with 82% of the responders to finance this sector, followed by prime residential with 79%. In addition, over half of the lenders would finance residential development projects (61).

Other sectors that attract a large number of lenders are prime supermarkets for which 77% of lenders offer financing, prime life science with 71% and hotels with 68%. When it comes to secondary assets or locations, financing options drop quickly to fewer than 20 lenders or 10-15% of lenders. The only exceptions are secondary logistics assets, which are financed by 49% of lenders, secondary residential by 41% and secondary student housing by 36%.

Nick Harris, head of UK and cross-border valuation at Savills, said: “The Bayes Year End CRE Lending Survey provides an invaluable insight into the current challenges and competitiveness within the UK commercial real estate finance sector. With ongoing difficulties in the sourcing of financing opportunities, the lending industry is tending to offer higher LTV ratios and tighter margins for prime and secondary assets.

“Nevertheless, the underlying cost of finance for borrowers remains relatively high and yields in some sectors are not compressing, partly due to the lack of transactional activity. If the underlying cost of finance were to become cheaper, this should create a virtuous circle, triggering a more active transactional market and capital growth.”

Aparna Sehgal, a partner at law firm Winston & Strawn London, said the second half 2024 data shows an encouraging increase in both loan origination and, importantly, acquisition financings year-on-year and over the first half of the year and that reinforces the broadly shared market sentiment of the previous 18-24 months which was "survive ‘til '25".

"The volatility in Q1 2025 in the global financial markets has disrupted the anticipated and long awaited sustained upward trajectory in transactional activity.

“Still, the increasing market share of UK corporate banks and UK retail banks in H2 2024 means they may play an unexpectedly large role this year in filling the gap left if the shortage of other institutional capital continues or even rises in response to macroeconomic developments. This data from the second half of last year may be a snapshot in time rather than ‘a scene set’ for this year.”

Charlie Foster, head of commercial real estate, at NatWest, said the report reflects the realities of the investment market. "Origination volumes have been persistently low, with lending activity weighted more towards refinance than acquisition or development.

“Nonetheless, NatWest Real Estate Finance had a strong year, benefiting from our consistent through-the-cycle approach to grow our book, notably in H1 when several other lenders remained on the sidelines. While most lenders became more active towards the end of 2024, many continue to focus on the same sub-set of sectors and regions. We therefore see further opportunities to grow in 2025, without compromising our disciplined approach to lending, which in turn underwrites the resilient performance of our back-book.”

Peter Cosmetatos, chief executive of CREFC Europe, said 31 December 2024 feels a very long time ago already, and geopolitical and geoeconomic factors – as well as technological developments – are complicating any assessment of real estate fundamentals or the flow and cost of capital into our market.

“As a result, the data points provided by this research feel especially historical, and the shifting relationships between different sources of capital including through back leverage make the market more opaque. What does seem clear, both from the research and anecdotally since the year-end, is that the UK CRE financing market is diversely funded, resilient and well-functioning, even in these highly uncertain and persistently challenging conditions."

The Bayes survey collects data directly from 80 banks, insurance lenders and debt funds twice a year. It started in 1997.