Sluggish UK commercial real estate market sparks refinancing price war

New lending for UK commercial real estate (CRE) rose 29 per cent last year to reach the highest level in a decade, the latest Bayes Business School market survey reveals.

Some £52.7 billion in new loans for commercial real estate were issued, with activity driven by non-bank lenders and UK banks. Their new lending was up 51 per cent and 29 per cent respectively.

However, with a sluggish market for new construction projects, lenders competed on price to protect market share. Around 60 per cent of lending involved refinancing, with nearly one-third of CRE loans refinanced during the year.

Debt funds were “the clear winners” in the battle for new financing deals, according to report author Dr Nicole Lux.

Dr Lux, Senior Research Fellow at Bayes Business School’s Real Estate Research Centre, said: “For generations UK banks were the dominant force in commercial real estate lending but last year their share of the market fell from 40 per cent to 36 per cent, continuing a long decline since the arrival of debt funds 10-12 years ago.

Debt funds were the clear winners in this process – increasing their market share from 12 per cent to 28 per cent. That surge means alternative lenders, including insurance companies, now hold 45 per cent of outstanding CRE loans and seem set to break the 50 per cent barrier over the next few years.

For the first time the analysis used AI tools and open search tools to connect and support the report findings with transaction announcements.

The bi-annual survey also reveals:

• Increasingly competitive loan pricing saw British banks and debt funds cut rates for prime office space by 45bps and 30bps respectively. Other lenders followed – but they also competed through LTV (loan-to-value) levels and fees.
• Junior loan margins, particularly for prime assets, fell by 45–55bps.
• Outstanding commercial real estate loans rose just 0.8 per cent y-o-y to stand at £174 billion – with lenders relying on refinancing to offset low transaction levels.
• It is estimated that around 19 per cent (£33 billion) of loans will mature this year and require refinancing.
• Lenders reduced their defaulted loan book significantly – with such loans falling to 3.8 per cent, compared to 6.3 per cent in the middle of 2025, but still up on the long-term average of 3 per cent.
• An estimated 15-20 per cent of commercial real estate loans do not have covenants that would allow lenders to intervene before a loan default occurs.
• Additionally, interest cover ratios* (ICR) remain stressed across loan portfolios. 13 per cent of loans tested have a coverage of less than 1x, compared with just 1 per cent in 2016.
• Development financing has emerged as a key growth area for lenders, accounting for 16 per cent of new lending (up from 15 per cent in 2024) and 19 per cent of total outstanding commercial real estate debt.
• 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.
• The difficult market may explain a growing concentration: the top 20 lenders account for 69 per cent of the total market and originate 72 per cent of loans.
• Secondary lending, an important indicator of the health of the market, appears to be picking up – with syndication deals reaching £14.7 billion.

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.

Global context inducing anxiety

However, the US-Iranian conflict and the failure of bridging lender MFS since the new year have dented that positive sentiment, according to Dr Lux.

She said: “The two and five year Sonia rates increased by 30bps 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 focussed 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.”

Interest cover ratios remain stressed across loan portfolios – with 13 per cent receiving an ICR test result of below 1x. Just 37 per cent have an ICR above 2x (down from 73 per cent in 2017). With the rise in interest rates, more than one-third (35 per cent) of loans have now shifted to a level of 1.4x – 2.0x ICR, while another 15 per cent are at 1.0x-1.4x – levels which 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.

In 2026, £33 billion of loans are expected to mature and require refinancing. Development financing has emerged as a key growth area for lenders, accounting for 16 per cent of new lending and 19 per cent of total outstanding CRE debt.

Currently, £32 billion in development loans remains outstanding.