Opportunities for strategic lenders as competitive debt market sees structure become as important as price
At its 38th annual Financing Property presentation on 2 June, Savills revealed that against a backdrop of challenging market dynamics, the debt market remains competitive, with structure becoming as important as price to borrowers.
The international real estate advisor noted that liquidity remains strong, albeit selective, and there are still attractive opportunities for borrowers to secure debt, however the market has undoubtedly evolved and, while margins still matter, sophisticated borrowers are increasingly focused on the overall structure of a debt package.
Nick Harris, Savills head of UK and Cross Border Valuation, says: “Over the course of last year and into this year the debt market was exceptionally competitive, driving margins for some assets to levels we haven’t seen for some time. One of the most important trends is that the market conversation has moved beyond simple margin comparison, demonstrated by increased covenant and hedging flexibility.”
Overall lending appetite remains strong with Savills referring to the latest Bayes survey, which shows lending up 29% year-on-year with 40% supporting new acquisitions and 60% for refinancing. Bank lenders have continued to dominate overall, accounting for 62% of new lending against 38% from non-bank lending.
Inevitably, the conflict in the Middle East has resulted in some disruption with the anticipated impact of increased energy prices on interest rates and further rises in swap rates, which are linked to a rise in the cost of debt. Savills notes that interestingly not all lenders have responded in the same way with some quickly becoming more cautious, particularly around underwriting or distribution risk. Others, meanwhile, have continued with business as usual, reinforcing the fact that the UK remains the deepest and most diverse lending market in Europe with significantly more active lenders than any other European market.
Nick continues: “Undoubtedly, the real estate market continues to face disruption. There are clear headwinds from the evolving geopolitical backdrop, its impact on the trajectory of the UK economy and, in turn, interest rate expectations. However, success in this phase of the cycle comes down to strategy – how disruption is managed, how downside risk is mitigated and how income resilience is maintained. For lenders, backing the right sponsors and maintaining discipline on execution is key and, for borrowers, it is crucial to bring forward opportunities that are robust, well-structured and able to withstand greater scrutiny. Ultimately, those who approach the market with clarity, discipline and a long-term outlook will be best placed to succeed.”
In terms of the commercial real estate market, overall, a lack of competitive tension, combined with bond yield softening have all led to further price stability, says Savills Head of UK and European commercial research, Mat Oakley. However, based on the level of assets currently under offer, the firm expects more activity in the second half of the year with 2026 anticipated to see a 5% growth in activity, albeit no yield hardening. Mat comments: “While fundamentals remain strong, confidence will continue to be a challenge for both the occupational and investment markets. We do foresee increased levels, particularly from more income focussed investors, compared to traditional cyclical players – although it is important to note that the opportunity to buy core at value-add prices will not last.”
In the residential sector, Savills highlighted that while the mainstream market is in a more robust position to adapt to the recent shift in affordability than it was in 2022, reduced demand is expected to place downward pressure on prices. The firm’s latest forecast points to a modest short-term decline in UK house prices this year, with capacity for growth remaining in the medium term.
Emily Williams, residential research director at Savills, comments: “While caution is likely to dominate the mainstream housing market in 2026, there are some interesting movements in other areas of the market around policy changes, particularly the taxation of high value property and rental regulation that will see these sectors going through some fundamental structural shifts. For the Built-to-Rent market, the case for institutional investment continues to gather momentum, although viability pressures pose an increasing challenge to development.”