Expansion of private credit triggers structural shift in UK real estate market
The growth of the private credit sector has created a structural shift in the UK’s real estate market, as traditional lenders have scaled back.
According to Dan Marriott, real estate partner at Macfarlanes, this is due to the evolution of the real estate lending market over the past few years, which has seen alternative lenders increase their share. The lower rate environment means that this shift is likely to be permanent.
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“The sources of investment are changing,” said Marriott. “Higher interest rates have led to reduced transactions and stricter lending standards.
“Similarly to the global financial crisis, more traditional lenders such as banks and insurers have scaled back.
“This void has been filled by alternative lenders. While major central banks are now on a rate-cutting path, the expansion of private credit is likely to be a permanent structural change. And it’s thanks to a regulatory-driven retrenchment of bank lending.”
Marriott has noted that there have been some significant changes in the UK real estate market over the past few years, including the rise of alternative lenders. He added that operational real estate is currently responding to a series of mega-trends including demography, digitisation, deglobalisation and decarbonisation. These trends will help shape the market going forward.
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His colleague Laura Bretherton, finance partner at Macfarlanes, added that even within this crowded marketplace, and against the backdrop of lower transactional activity in the real estate market, there are still a number of opportunities for private credit.
“In 2025 and into 2026, a vast number of the financings put in place between 2020 and 2022 (when transactional activity was at a peak) will mature,” Bretherton said.
“We anticipate that ‘refinancing wall’ to offer opportunities for private credit to refinance existing bank debt.
“With banks being increasingly conservative in terms of the leverage they can offer, coupled with the regulatory constraints that they face in originating and holding commercial real estate loans, there is a potentially very large opportunity for private credit to step into the breach.”
However, Bretherton added that as more private capital pours into the real estate debt markets, the risk profile of these investments could change.
“There is potentially a risk that as the number of credit fund lenders look to seize some of the opportunities in the current real estate market, some funds start to take on increased risk by, for instance, offering higher leverage, agreeing looser terms and lower pricing in order to win mandates,” she added.
“However, there appears to be sufficient prudence among sophisticated credit managers to minimise these risks, and lenders will look to differentiate themselves among an increasingly wide pool of potential lenders based on their relationships with sponsors and borrowers, the certainty and speed of execution that they can offer, and their ability to offer flexible financing solutions to meet their potential borrowers’ business plans.”
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Bretherton said that refinancing is expected to be a consistent theme across the year ahead, especially as transactional activity picks up.
“Lenders will need to focus on the ways in which they can differentiate themselves from other credit fund lenders, in order to win these mandates,” she added.
