Debt funds are the “clear winners” in the fight for new UK commercial real estate (CRE) financing, according to the latest survey from Bayes Business School.

Their market share jumped from 12% to 28% in 2025, contributing to alternative lenders now holding 45% of outstanding CRE loans.

Dr Nicole Lux, senior research fellow at Bayes Business School’s Real Estate Research Centre, said: “For generations UK banks were the dominant force in CRE lending, but last year their share of the market fell from 40% to 36%, continuing a long decline since the arrival of debt funds 10 to 12 years ago.”

She added that alternative lenders, including insurers, were likely to surpass a 50% market share in the coming years.

The shift comes alongside a rebound in lending activity. New CRE lending rose 29% last year to £52.7bn, the highest level in a decade, driven by both non-bank lenders (+51%) and UK banks (+29%).

However, subdued development activity meant competition intensified elsewhere. Around 60% of lending was tied to refinancing, with nearly a third of existing loans reworked during the year as lenders competed on pricing to defend market share.

Loan margins tightened across the board. British banks and debt funds cut rates on prime office loans by 45 basis points (bps) and 30bps respectively, with further competition on loan-to-value ratios and fees. Margins on junior loans for prime assets fell by 45bps to 55bps.

Despite stronger lending volumes, total outstanding CRE debt rose just 0.8% year on year to £174bn, reflecting weak transaction levels and a reliance on refinancing.

Around £33bn of loans, equivalent to 19% of the total, are expected to mature this year, creating a significant refinancing pipeline, according to the report.

Lenders reduced distress levels, with defaulted loans falling to 3.8% from 6.3% in mid-2025, although still above the long-term average of 3%. The report also estimates that 15% to 20% of loans lacked covenants allowing early lender intervention.

Meanwhile, development finance is emerging as a growth area, accounting for 16% of new lending and 19% of total outstanding debt with £32bn currently in the market.

Nick Harris, head of UK and cross-border valuation at Savills, said: “While we saw a pick-up in transaction volumes during the year, refinancing activity once again dominated the lending landscape at 60% of loan origination. The competition to finance good-quality assets intensified further and, in general, lenders adjusted their loan pricing down by 25bps to 50bps in 2025, as well as using other levers such as flexible covenants.

“Clearly, since the time of the data covered by the survey, the lending market has encountered additional challenges but remains in a healthy position.”

Click here to see Property Week’s recent analysis of the relative burden of borrowing across listed UK property companies to see how they fare in today’s higher-rate and inflationary environment.