Commercial Mortgages in the UK: Insights on 2024 and Outlook for 2025

Reflecting on 2024

Commercial mortgages remained a focal point for UK businesses seeking to acquire or refinance real estate throughout 2024. Despite the Bank of England’s decision to lift the base rate to around 5.25% by mid-year, the commercial mortgage market showed a degree of resilience. According to data from UK Finance, new commercial real estate lending totalled an estimated £22.7 billion in the first half of 2024 - slightly down from £23.1 billion over the same period in 2023.

Delinquencies and defaults have been concentrated in commercial properties, though apartment buildings have also seen an uptick  © Bloomberg

Part of the reason for this modest decline lies in shifting market sentiment. Office space in major urban centres, particularly London, continued to grapple with average vacancy rates hovering around 13-15%, driven by the persistence of hybrid working. On the flip side, industrial and logistics properties remained in demand, buoyed by the surge in e-commerce and increased inventory stockpiling. Valuations for prime warehouse space in key logistics corridors (e.g., Midlands “Golden Triangle”) held up well, often achieving yields under 5% - a stark contrast to more subdued office yields exceeding 6.5-7% in some secondary locations.

Meanwhile, lenders became more selective. LTV ratios across the sector typically ranged between 60-70%, with banks keen to guard against any further fluctuations in property prices. For borrowers, this translated into stricter due diligence, slightly higher margins, and an emphasis on stable tenant covenants or robust future-use cases (such as refurbishment for eco-efficiency).

What to Expect in 2025

Looking ahead, 2025 may offer a more stable lending landscape if inflation continues its downward trend towards the BoE’s 2% target. The central bank’s Monetary Policy Committee has signalled that further rate hikes will be contingent on inflationary data; if the cost of borrowing remains steady or even dips slightly, businesses could see better financing terms.

Sustainability is poised to become a crucial differentiator. With the UK government pushing for greener building standards, lenders are increasingly favouring projects that incorporate energy-efficient measures - from retrofitting older stock with solar panels to investing in top-tier insulation. This can translate into marginally lower interest rates or improved loan conditions for properties meeting stringent ESG criteria.

In regional markets, ongoing “levelling-up” initiatives may continue to boost development outside the South East. With local authorities and the British Business Bank funnelling grants and guarantees to rejuvenate high streets or industrial estates, expect pockets of growth across cities like Manchester, Birmingham, and Leeds. Businesses that plan to acquire commercial property in these areas - especially for mixed-use developments - could benefit from specialized lending schemes.

Ultimately, in 2025, commercial mortgages will remain a critical instrument for businesses seeking to solidify their property footprint. The watchwords will be strategic location choice, ESG alignment, and robust financial modelling. As rates teeter between possible hikes and a holding pattern, preparedness and adaptability will help ensure the right deal at the right moment.