As we step into 2025, the real estate finance landscape is marked by a mixture of optimism and caution. Whilst there is now growing sentiment that the market may have turned a corner with confidence in the UK real estate market returning, uncertainty as to future interest rates and macro-economic headwinds may still temper a strong recovery. 

What are the key trends shaping the market in 2025?

1. Bottom of the market? 

There is now sentiment that we have reached the bottom of the market. Whilst investor appetite has returned on the buy-side (with ample dry powder to deploy), there is still a scarcity of quality assets coming to market as discretionary sellers prefer not to sell until the market picks up.

This is leading to a lot of competition for the available high-quality assets. Due to the lack of transaction volumes, we are still in a period of price discovery between buyers and sellers as well as between borrowers and lenders. This is set to continue until transaction volumes increase and asset values stabilise (resulting in LTV covenants potentially being waived or deferred). 

The UK property market continues to be seen as a stable and attractive long-term investment, generating greater attention from US and Asian investors and lenders.

2. Refinancing gap and distress: Is the worst now behind us? 

Although the volume of impending loan maturities is now beginning to decrease, the latest report by AEW still projects there to be around an €86 billion debt funding gap for 2025-27. 

The wave of distress in real estate has not materialised on the scale that some predicted. However, it remains to be seen whether sale of distressed assets will increase as the market picks up and lenders and investors decide to close out their losses in a more buoyant market.

3. Interest rates: Reducing but still higher for longer

Whilst interest rates are expected to fall over the next 9-12 months before plateauing, they will still sit well above pre-Covid levels – that will remain a challenge for some borrowers who still need to refinance existing facilities in a new interest rate environment.

In addition, it’s unclear whether macro-economic headwinds (for example, sticky inflation, sustained higher government bond yields or potential new tariff and sanction regimes) will dampen appetite for real estate assets.

Interest rates, together with inflationary pressure on operating costs, may still lead lenders and borrowers to re-adjust debt service financial covenants.

4. Lender specialisms and collaboration

The continued diversification of lenders in the UK market has made for a robust but very competitive market where transaction volumes are at their current levels. In this market, a lender’s familiarity with an asset class can be just as important as speed of execution and competitive pricing.

In this crowded market, collaborations between debt funds and banks will continue to be a growing trend in order to address capital requirements and leverage specialisms. 

Examples of collaboration include back leverage models and A/B loan structures, as well as agreeing framework strategic partnerships.

5. Beds, sheds, meds but what else? 

Whilst the current hot asset classes of BTR, logistics and life sciences remain popular, there is also renewed interest in other asset classes, such as prime office space, out-of-town retail, hospitality (with sufficient FF&E reserves), self-storage and data centres.

The trend of bifurcation of office assets continues – prime office space with strong ESG credentials remains a prized asset, whilst ageing secondary office space risks becoming stranded unless it can be refurbished / re-purposed.

After years in the doldrums, prime retail space, such as out-of-town retail parks, are beginning to garner more interest from investors as yields improve.

Data centres continue to be an area of focus despite complexity around operating arrangements and ESG impact.

The outlook

The 2025 real estate finance landscape is expected to be shaped by emerging opportunities, as well as some persistent challenges. As investor confidence continues to grow, the focus will be on navigating the complexities and subtleties of market conditions where specialist knowledge and insight will be key.