"In commercial property, fewer deals work smoothly for all stakeholders but we are seeing creative structuring to bridge the financing gap"
- Sam Lewis - Heligan
New data from NHBC reveals that seven out of twelve UK regions saw an increase in housing registrations in 2024, with notable growth in the North and Scotland. In contrast, London recorded a 48% decline, primarily due to financial strain among affordable housing providers.
The reduction in planning permissions in London and the South East is deepening housing shortages in those areas, while regions like the North West and Midlands are expected to benefit from a more stable development pipeline.
Finance constraints squeeze development viability
According to a new report by the Heligan Group, the viability of property developments is under pressure due to rising borrowing costs. Higher gilt yields have driven up benchmark interest rates and equity return expectations, straining project economics.
Senior development loans now range from 6.5% to over 10%, depending on borrower profile.
Mezzanine and junior debt are typically priced in the low teens.
Bridging finance remains costly, at 0.7%–1% per month (8–12%+ annually).
“Rising yields have compressed margins by reducing Gross Development Value (GDV),” explained Sam Lewis, Head of Debt Advisory at Heligan. “Developers, especially in the commercial sector, are now reassessing viability—many projects can’t proceed without pre-lets or public sector anchor tenants.”
Small developers are bearing the brunt of these pressures, facing challenges in securing finance amid rising build costs that outstrip land value growth. In contrast, larger housebuilders are insulated by previously secured lower-rate land and benefit from economies of scale. The disparity is evident: the top ten housebuilders saw only a 4% drop in housing starts last year, compared to a 36% decline among smaller developers.
With global uncertainty and delayed decision-making continuing into 2025, overall construction confidence remains low. To manage risk, many developers are phasing projects, pivoting to build-to-rent schemes, or seeking equity funding in place of debt.
Strategic shifts in PBSA and commercial development
Lewis noted that developers are increasingly focused on long-term strategy rather than active site work—a trend slowing housing delivery. Purpose-built student Accommodation (PBSA) remains in a growth phase, particularly in university cities such as Manchester and Birmingham, often backed by university land or guarantees. However, forward funding challenges and rent caps are prompting developers to seek backing from institutional investors instead of traditional lenders—a riskier route in search of higher returns.
In the commercial space, hybrid working has reshaped demand. Prime office developments remain viable, but speculative office builds are limited to schemes with strong tenants. Secondary office stock continues to face high vacancy rates. Retail, while seeing a modest footfall rebound post-COVID, remains challenged by e-commerce trends. New retail development has largely given way to mixed-use regeneration.
“In commercial property, fewer deals work smoothly for all stakeholders,” Lewis said, “but we are seeing creative structuring to bridge the financing gap.”
Valuation disconnect slows down deals
One of the major headwinds across all sectors is a widening gap between developer valuations and those from lender panels. While developers price based on future growth and recovery, lenders are applying cautious, retrospective valuations. This misalignment is slowing deal flow, particularly in residential and regeneration schemes, and driving more developers toward alternative finance options.
Outlook: Modest recovery, regional strength
Although financing conditions remain tight, some relief may be on the horizon as monetary policy gradually loosens. Yet, persistent GDP stagnation and subdued consumer confidence continue to cloud the outlook. Housing completions in 2025 are expected to remain in the low 200,000s, with more meaningful growth likely in 2026.
Material costs are stabilising, but labour shortages will keep overall inflation at around 3% this year, easing to 2% in 2026.
Prediction for the best and worst performing regions
“Regionally, the Midlands, North, and parts of Scotland should outperform in development, while London’s housing supply remains constrained by financial uncertainty among housing associations. The commercial investment will focus on prime offices and life sciences hubs, while secondary office markets and retail remain weak", concluded Lewis.
