Debt fund defaults in UK real estate soar past 20%: survey
Banks have also dealt with their defaulted loan books by reducing them between 10% and 20% through refinancing and increased loan syndication
[LONDON] Alternative lenders to the UK commercial real estate sector saw their default rates climb past 20 per cent in the first half of the year, revealing elevated risks in their portfolios, according to a survey of creditors by Bayes Business School in London.
That is a marked surge from the 15.2 per cent reported in December 2024.
It is also significantly higher than the default rates of between 2 and 3 per cent seen at traditional banks, and is possibly due to slightly different reporting guidelines, the report by the institution said.
“It is slightly concerning that debt funds are showing default rates above 20 per cent,” said Neil Odom-Haslett, president at the Association of Property Lenders.
The June 2025 Bayes lending report reflects responses from 73 lenders.
Ever since banks were hit by the global financial crisis, a raft of prudential regulations put in place by global watchdogs has seen them retreat from risky sectors such as commercial real estate.
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Alternative lenders have gradually filled the gap, almost doubling their UK market share to 22 per cent since Brexit.
By contrast, British banks have decreased their share by 1 to 39 per cent.
Banks have also dealt with their defaulted loan books by reducing them between 10 and 20 per cent through refinancing and increased loan syndication.
Despite this, soured debt has risen across the board, doubling from a long-term average of 3 to 6.3 per cent, even as the underlying commercial real estate market starts to see some signs of recovery.
The problem has also been compounded by disagreements between buyers and sellers over valuations of a property bought at an inflated amount during the low interest-rate boom era, but is now likely to fetch much less after the bust caused by the rise in borrowing costs following Russia’s invasion of Ukraine.
This has led to a drop in transaction volumes and a slow correction in values, increasing the relative indebtedness of some borrowers.
It also meant that lenders were left fighting over fewer deals, particularly in favoured sectors such as living and logistics.
“Hopefully, lenders will maintain discipline, although there’s growing evidence suggesting covenant-lite deals are becoming more prevalent as lenders chase deals,” Odom-Haslett said, referring to relaxed terms on some loans.
However, there’s some emerging evidence that rising competition is leading to better pricing for borrowers, potentially making the market more liquid for some asset categories.
UK banks as well as debt funds have reduced their loan pricing in tandem.
They have dropped their margins against prime office loans by an average of 35 basis points and 33 basis points, respectively.
Even the secondary office spaces are getting better deals, with margins dropping by 23 basis points and 26 basis points, respectively.
“Competition for the best assets remains intense, with lenders offering increasingly tight margins, with a greater focus on the larger loan sizes,” said Nick Harris, the head of cross-border valuations at Savills. BLOOMBERG
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