Capital Flows into UK Real Estate Debt – Summary Report

Recent market analysis reveals a sustained and significant influx of capital into the United Kingdom's commercial real estate (CRE) debt markets, a trend that is projected to continue its upward trajectory into 2025 and beyond. This surge is underpinned by a series of strategic interest rate reductions by the Bank of England and a gradual, yet steady, recovery in property transaction volumes.

A comprehensive review of market data indicates that new lending for UK CRE experienced a notable 11% increase in 2024. This momentum has not only been maintained but has accelerated, with the first half of 2025 witnessing a remarkable 33% year-on-year increase in new lending, amounting to £22.3 billion. This growth is further substantiated by reports from major industry analysts, who project that the UK real estate market is on course to deliver total returns exceeding 8% for the full year 2025, building upon the 7.7% returns seen in 2024.

One of the most significant trends shaping the current landscape is a strategic pivot among traditionally equity-focused investors, particularly family offices. These investors are increasingly reallocating capital away from direct property ownership and towards debt-oriented strategies. This shift is driven by a desire to maintain exposure to the real estate sector while mitigating the downside risks associated with direct equity investments in a climate of persistent macroeconomic and political uncertainty.

The appeal of the UK's property debt market extends well beyond its domestic investor base. A diverse and growing cohort of overseas investors, from a record 47 countries, are actively deploying capital into UK real estate debt. This international interest, which is not limited to US-based entities, underscores the global confidence in the stability and attractive returns offered by this asset class. The intense competition among these lenders is also contributing to more favorable conditions for borrowers, with a notable reduction in lender margins observed across various property types.

While traditional banks continue to adopt a cautious lending posture, generally operating at lower leverage levels, the market has seen a corresponding rise in the activity of alternative lenders. These firms are engaging in more complex and structured deals, filling the gap left by the more conservative banking sector. Debt funds, for instance, now account for a substantial 57% of all commercial development finance. However, this increased risk appetite is not without its challenges, as evidenced by a higher default rate of 20.3% reported by debt funds, compared to the overall market average of 6.3%.

Looking ahead to 2026, the prevailing conditions of macroeconomic and political uncertainty are expected to persist. However, rather than dampening the market, these conditions are anticipated to further bolster the case for debt investment over equity. As investors continue to seek stable, income-generating assets with a degree of insulation from market volatility, the structural advantages of real estate debt are likely to become even more pronounced. The continued availability of capital from a diverse range of domestic and international sources, coupled with the ongoing recovery in transaction activity, positions the UK's real estate debt market for sustained growth and resilience in the years to come.