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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.

New CRE loan volumes increased by 11 per cent year-on-year in the 12 months to 31 December 2024, reaching ?36.3 billion. Most of the recovery was due to stronger lending activity during the final quarter. The two base rate cuts during H2 (second half) 2024 might have been a factor for the increased loan origination and recovery of the market during the second half of 2024.

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

The bi-annual CRE Lending Reports are researched and written by , Senior Research Fellow at , part of City St George’s. ×ãÇòtips.

Dr Lux 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 per cent of loans, valued at ?57 billion, were due to mature in 2024. Data analysis for the report shows that 38 per cent of new lending was funded through internal refinancing, while approximately 10 per cent of loans that had already matured in 2024 were extended. That means some ?32.6 billion of loans are expected to mature in 2025.

International banks return to UK market

UK banks accounted for 46 per cent of new loans during 2024, with international banks – particularly those with branches in London – providing 31 per cent. The international banks with London branches were particularly active during the 2^nd half of 2024.

Debt funds were quieter, contributing 17 per cent of new lending.

A change was also visible for loan syndication and participation market, with 30 active lenders syndicating ?11.7 billion last year.

Dr 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.”

Default rate surges

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 per cent, up from 4.9 per cent in only six months.

Loan to value ratios for new prime office loans rose from 53 per cent to 55 per cent last year, and from 54 per cent to 56 per cent for prime logistic loans. At the same time, loan pricing fell by 25 basis points for prime office loans and 17bps for prime logistic loans. Lowest pricing for prime logistic loans started from 150bps.

Due to a shortage of prime logistic assets, pricing for secondary logistic assets and for secondary office loans fell by 51bps and 37bps respectively. Despite the rate cuts and loan pricing decline, overall financing rates remain high compared to the net income yields of prime property.

Total debt costs averaged 6-7 per cent for a moderate Loan to Value of 55-60 per cent.

Mixed picture for development finance

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 ?32 billion, with a further ?25 billion available but undrawn.  New development lending, however, slowed down in Q4 2024, which meant the sector’s share of new loan volume fell to 15 per cent.

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 provided 52 per cent of all speculative development financing, 36 per cent of residential development funding and 64 per cent of development finance for alternative asset classes. International banks boosted their activity in the UK, providing 36 per cent of all speculative development finance. However, their targeted projects are mostly concentrated in London office schemes.

UK retail banks step up for regions

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

Responding to the report’s findings, John Hardie, CBRE Senior Director (Debt & 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 per cent 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.”

Aparna Sehgal, a Partner at Winston & Strawn London LLP, said: “The H2 2024 data shows an encouraging increase in both loan origination and, importantly, acquisition financings year on year and over H1 2024, reinforcing 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 hugely valuable Bayes CRE Lending 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, 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."