From Jan. 1, 2027, the capital a UK bank holds against a commercial property loan will depend far more closely on the loan itself: how much of the building’s value it covers, and whether repayment relies on the rent the building produces.
The Prudential Regulation Authority, in consultation with HM Treasury, pushed the UK start of the final Basel III standards back by a year in January 2025, pointing to doubts about the timetable in other major economies and to the UK’s own competitiveness and growth, and it confirmed the final rules in Policy Statement PS1/26 in January 2026.
The UK version of the framework, known as Basel 3.1, sorts property loans by risk through weights that respond to loan-to-value ratios and to whether a loan depends on cash flows from the property it finances, and it removes the 100% risk weight floor that applied to some commercial property exposures not reliant on those cash flows.
Among lenders using the standardised approach, analysis by the consultancy 4most suggests that those focused on low loan-to-value or residential lending may see their risk-weighted assets fall, while those whose books lean toward income-producing commercial property or higher loan-to-value loans should expect to hold more capital.
Capital Follows the Loan
Under the final rules, firms must assess every existing residential and commercial real estate exposure by Jan. 1, 2027, to determine whether it is materially dependent on the cash flows generated by the property, according to a review of PS1/26 by law firm TLT.
The answer decides which set of risk weights applies, and it is likely to shape how banks price refinancing requests for office, retail and logistics assets that depend on tenant income to service their debt.
A modestly geared loan against an owner-occupied building may become cheaper for a bank to hold. A highly geared loan against a multi-let investment property may cost more.
Development finance sits at the far end of that range, since loans for land acquisition, development and construction carry higher capital charges than standard investment lending under the Basel framework.
A Market Already in Motion
New lending for UK commercial real estate rose 29% in 2025 to £52.7 billion, its highest level in a decade, according to Bayes Business School’s May 2026 lending report.
Non-bank lenders drove much of that growth, and their new lending rose 51%. With new construction projects in short supply, lenders competed on price to hold on to market share, and around 60% of lending involved refinancing.
UK banks saw their share of the market fall from 40% to 36% in 2025, which the report’s author placed within a long decline dating back to the arrival of debt funds a decade or more ago.
Debt funds lifted their market share from 12% to 28%. Alternative lenders, including insurance companies, now hold 45% of outstanding commercial real estate loans, a share the report expects to pass 50% over the next few years.
Lessons From the Continent
Basel III took effect across the European Union in January 2025, two years ahead of the UK, with some elements phased in over later years.
The 2026 European Real Estate Allocator Outlook published by Markets Group describes the result as a structural change in the continent’s real estate debt market.
Construction loans became far more expensive for continental banks to carry, and the outlook singles out one segment in particular.
Finance for regional developers building between 10 and 50 homes at a time draws the harshest capital charges in the EU rules, and banks have now left that market almost completely.
The outlook, which draws on the views of pension funds, asset managers, investment advisers and family offices, presents the bank retreat as a lasting opportunity for institutional lenders prepared to step into the space the banks have left.
When European banks were pressed to shrink their property exposure after the 2008 financial crisis, much of the resulting business passed to investors who spent decades mastering non-performing loans and to specialist lenders able to price credit that regulated balance sheets were under pressure to release.
Lenders and investors without depositors to protect are not bound by the same capital charges, which leaves them free to price risks that banks now find costly to carry.
The Outlook for UK Borrowers
If the UK follows the continental pattern, UK banks are likely to remain competitive on lower-geared loans against stable, income-producing assets, where the capital treatment is relatively light, while development projects and higher-leverage refinancings move increasingly toward funds, insurers and other non-bank capital.
Alternative lenders already hold 45% of outstanding UK commercial property debt, and debt funds more than doubled their market share in 2025.
The rules taking effect on Jan. 1, 2027, are likely to add to that momentum in development finance and higher-leverage refinancing, two segments in which they raise the cost of bank capital.
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