Prime real estate lending shows signs of recovery as volumes rise

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

Bayes (formerly Cass) said new CRE loan volumes increased by 11% year-on-year in the 12 months to 31 December 2024, reaching £36.3bn (€43m). Most of the recovery was due to stronger lending activity during the last quarter of 2024, the report found.

The two base rate cuts during the second half of 2024 “might have been one factor for the increased loan origination and recovery of the market” during the second half of 2024, Bayes said in its study. 

However, default loans on lenders’ books rose from 4.9% to 5.9% in just six months.

The report’s author Nicole Lux, senior research fellow at Bayes Business School, part of City St George’s University of London, said: “Last year was difficult for CRE lenders, who had to deal with continued market value uncertainties, existing non-performing loans, and a surge of loan repayments, while generating new business. 

“However, 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 £57bn, 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 some £32.6bn of loans are expected to mature in 2025, Lux added. 

UK and international banks return to lending market

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 during the second half of 2024. Debt funds were quieter, contributing 17% of new lending.

A change was also visible in the loan syndication and participation market, with 30 active lenders syndicating £11.7bn last year, according to Lux’s research.

She 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. At the same time, loan pricing fell by 25 basis points for prime office loans and 17bps for prime logistics loans.

Development finance gains traction

The development finance market has been a strong positive contributor to the lending market. The total outstanding development loans on lenders’ loan books are at a long-term high of £32bn, with a further £25bn available but undrawn. New development lending, however, slowed down in the fourth 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 84bps. Rates for speculative financing fell by 60bps.

Debt funds dominate the lending market with banks making a strong comeback

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 in the UK, providing 36% of all speculative development finance. However, 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 in the market. They also remain the strongest lender in all regional markets.

Responding to the report’s findings, 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 we as 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.

“Given the challenging macroenvironment It’s 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.

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.”

Peter Cosmetatos, chief executive of CREFC Europe, said: “31 December 2024 feels a very long time ago, 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 survey collects data directly from 80 banks, insurance lenders and debt funds twice a year. It started in 1997.

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