Navigating the Debt Landscape in 2025
Improved market sentiment signals new opportunities
The start of 2025 has brought a positive shift in sentiment, despite early challenges as the UK government worked to calm bond market nerves. With interest rates trending downward and inflation appearing under control, Capital Economics forecasts the Base Rate will close at 3.75% this year before dropping further to 3.50% in 2026.
This improving outlook has bolstered investor confidence – as seen in our latest NextGen Living Investor survey. The proportion of investors citing high finance costs as a barrier to growth has dropped significantly from over 60% last year to just 38% today. Market liquidity is robust, with lenders now offering more competitive loan-to-value (LTV) ratios of up to 60% and favourable pricing, particularly in the Living Sectors.
For investors, the changing landscape presents new opportunities, with over 55% of survey respondents noting that debt is now accretive to their investment strategy. Looking ahead, 42% expect to increase their debt requirements in the coming year – 21% to fund new development, 27% for acquisitions, and 31% to enhance returns.
In this evolving environment, three major trends are emerging that will define the commercial real estate (CRE) lending landscape in the year ahead
Improved market sentiment signals new opportunities
The start of 2025 has brought a positive shift in sentiment, despite early challenges as the UK government worked to calm bond market nerves. With interest rates trending downward and inflation appearing under control, Capital Economics forecasts the Base Rate will close at 3.75% this year before dropping further to 3.50% in 2026.
This improving outlook has bolstered investor confidence – as seen in our latest NextGen Living Investor survey. The proportion of investors citing high finance costs as a barrier to growth has dropped significantly from over 60% last year to just 38% today. Market liquidity is robust, with lenders now offering more competitive loan-to-value (LTV) ratios of up to 60% and favourable pricing, particularly in the Living Sectors.
For investors, the changing landscape presents new opportunities, with over 55% of survey respondents noting that debt is now accretive to their investment strategy. Looking ahead, 42% expect to increase their debt requirements in the coming year – 21% to fund new development, 27% for acquisitions, and 31% to enhance returns.
In this evolving environment, three major trends are emerging that will define the commercial real estate (CRE) lending landscape in the year ahead
The rise of private credit
The expansion of non-bank lenders in the CRE market has created valuable alternatives to traditional bank finance. These private credit providers approach lending opportunities with an equity mindset, creating stronger alignment between borrower and lender interests.
While 2024 saw deployment challenges as transaction activity failed to meet expectations, 2025 promises growth in market share for non-bank lenders. The old "loan to own" reputation is fading as borrowers increasingly embrace these flexible, fast-moving funders who can offer higher leverage and structured facilities to address loan maturities and value correction.
The growth of back leverage
Back leverage has evolved from a niche offering to a key component of the debt market. Debt funds are increasingly using back leverage to enhance fund-level returns and secure additional capital for deployment.
The banking sector has recognised this opportunity, with more lenders securing approvals to provide back leverage – which typically benefits from more favourable capital treatment than direct lending. This trend is creating more competitive pricing compared to direct lending options.
Looking forward to 2025, we can expect continued growth in this market with more debt funds utilising back leverage and banks expanding their offerings. The resulting increase in available structures will further enhance liquidity in the debt market, ultimately benefiting underlying borrowers through more competitive pricing.
The evolving funding gap challenge
The "funding gap" – the difference between outstanding debt and available refinancing – emerged as a significant concern when interest rates began rising two years ago. While interest rates declined in 2024, the pace was slower than predicted. However, lemding margins have reduced by 25-50bps due to increased competition, improving debt serviceability.
As we move through 2025, the funding gap will remain relevant, particularly as many loan extensions offered last year reach maturity. However, given the highly liquid lending market, continued interest rate reductions, and the growth of private credit offering higher LTVs and lower coverage ratios, this challenge is expected to diminish – potentially creating new deployment opportunities for non-bank lenders.
The rise of private credit
The expansion of non-bank lenders in the CRE market has created valuable alternatives to traditional bank finance. These private credit providers approach lending opportunities with an equity mindset, creating stronger alignment between borrower and lender interests.
While 2024 saw deployment challenges as transaction activity failed to meet expectations, 2025 promises growth in market share for non-bank lenders. The old "loan to own" reputation is fading as borrowers increasingly embrace these flexible, fast-moving funders who can offer higher leverage and structured facilities to address loan maturities and value correction.
The growth of back leverage
Back leverage has evolved from a niche offering to a key component of the debt market. Debt funds are increasingly using back leverage to enhance fund-level returns and secure additional capital for deployment.
The banking sector has recognised this opportunity, with more lenders securing approvals to provide back leverage – which typically benefits from more favourable capital treatment than direct lending. This trend is creating more competitive pricing compared to direct lending options.
Looking forward to 2025, we can expect continued growth in this market with more debt funds utilising back leverage and banks expanding their offerings. The resulting increase in available structures will further enhance liquidity in the debt market, ultimately benefiting underlying borrowers through more competitive pricing.
The evolving funding gap challenge
The "funding gap" – the difference between outstanding debt and available refinancing – emerged as a significant concern when interest rates began rising two years ago. While interest rates declined in 2024, the pace was slower than predicted. However, lemding margins have reduced by 25-50bps due to increased competition, improving debt serviceability.
As we move through 2025, the funding gap will remain relevant, particularly as many loan extensions offered last year reach maturity. However, given the highly liquid lending market, continued interest rate reductions, and the growth of private credit offering higher LTVs and lower coverage ratios, this challenge is expected to diminish – potentially creating new deployment opportunities for non-bank lenders.
Looking ahead
The 2025 debt landscape presents both challenges and opportunities. Lenders are expanding their focus to include emerging subsectors like seniors housing and co-living, while structuring more flexible terms to support diverse business plans. Non-bank lenders are increasingly offering junior debt and preferred equity options, contributing to rising transaction activity and narrowing the gap between buyer and seller expectations.
With improving market conditions, reduced refinancing pressures, and strong rental demand supporting debt serviceability, the outlook for 2025 appears promising for both lenders and borrowers in the commercial real estate sector.
Looking ahead
The 2025 debt landscape presents both challenges and opportunities. Lenders are expanding their focus to include emerging subsectors like seniors housing and co-living, while structuring more flexible terms to support diverse business plans. Non-bank lenders are increasingly offering junior debt and preferred equity options, contributing to rising transaction activity and narrowing the gap between buyer and seller expectations.
With improving market conditions, reduced refinancing pressures, and strong rental demand supporting debt serviceability, the outlook for 2025 appears promising for both lenders and borrowers in the commercial real estate sector.
