V I E W P O I N T S

Spring 2025 | Article 02/04

Sector overview

With uncertainty persisting about the shape of the UK’s economic recovery and the pace of interest rate movements over the next 12 months, what does this mean for investment into UK commercial real estate in 2025? We break down, sector by sector, the outlook for 2025.
RETAIL
Retail Parks will remain in high-demand throughout 2025 as they provide strong fundamentals including high footfall and low vacancy rates. Total returns for this year are forecast to reach 10.7%, amongst the highest across the retail sector. Rents are forecast to see a modest rise of only 2.0%, driven by a limited supply of stock in the leasing market.

Prime & super-prime Shopping Centres will continue to attract interest from investors this year, and it’s likely we will see more institutional and REIT interest in the sector than we have seen for the last few years.

As footfall continues to increase in the capital, driven by the return of international tourism and an expected increase in the number of office workers returning to the office, Central London shops will be in demand particularly in luxury locations.
INDUSTRIAL
Urban logistics will remain an attractive asset class driven by consumer behaviour. This will be boosted by the forecast growth in online shopping combined with customer demand for rapid delivery of goods.   

Investment in data centres will increase, driven by the huge growth in data demand. Major tech companies (Meta, Microsoft, Amazon, and Google) are investing billions into building hyper-scale data centres. But with such strong demand, demand which is only anticipated to ramp up further, many institutional investors are entering the sector or committing high levels of capital to increase their exposure.

As of early 2025, the UK's industrial investment market exhibited signs of recovery and growth following recent economic challenges and market adjustments. Recent analysis indicates a positive shift in investor sentiment towards the industrial sector throughout 2025 and beyond.
OFFICES
Key indicators point to the office sector crossing an inflection point in 2025. Strong fundamentals including robust tenant demand, an uptick in RTO policies and strong rental growth for best in class space, boosted by a lack of supply, underpin the case for increased confidence in the office sector.

Prime office yields will remain at higher than average levels over the short term, influenced by the risk free rate remaining elevated. Regional office markets, in particular, will offer relative value when compared to other sectors.

Whilst best in class assets will remain at the top of the shopping list, acquisitions of secondary assets and value-add opportunities with strong fundamentals, will see growth. Addressing obsolescence, whilst keeping development costs controlled will drive growth in retrofitting, refurbishment and change of use opportunities across the UK.

With the economic outlook for 2025 remaining unclear, some sales will be brought forward with owners seeking an earlier exit. We expect to see an increase in sales stock from Q2 onwards.
BTR
We expect to see a pickup in new starts and the resumption of stalled projects in 2025 as a more benign construction cost environment encourages developers to move forward set especially given the low level of starts last year. 

Rental growth will moderate relative to the very high levels that we have seen over the last few years but the imbalance between supply and demand in the rental sector will continue to underpin healthy rental growth. The regulatory changes (Renters Rights Bill) coming in and increased Stamp Duty Land Tax for Buy-to-let may well contribute to reduction in supply in the non-institutional Private Rented Sector.

Forward fund and forward purchase will remain the main routes for deploying capital but we expect to see a continuing of the theme of more operational assets trading this year. Some of the ‘first generation’ BTR investors/developers are looking to exit stabilised assets and recycle capital.
Affordable Housing
Affordable housing delivery is a key societal issue in the UK and at the front of the government’s agenda. The policy environment will put emphasis on increasing affordable housing but fiscal constraints will limit the ability of the government to move the dial by increasing grant funding. 

Accordingly, we see the role of private capital and For Profit Registered Provider (FPRP) structures as crucial to increasing delivery and we expect to see more activity in this space. This will see a continuation of the theme of partnerships between traditional Registered Providers (RP’s) and funds along with completely new entrants to the sector.

We expect to see an increase in activity in the acquisition of legacy stock (either Shared Ownership or Affordable/Social Rent) from RP’s by UK insurers and pension funds and possibly other sources of capital. This will help to provide liquidity to the vendor RP’s which are facing pressures from the need to invest in existing stock to meet regulatory requirements while funding development programs. It gives the purchaser access to stabilised stock with index linked income streams which match long term liabilities.

Devolution should help increase affordable housing delivery and along with regulatory changes allow a greater role for local government pension schemes to invest in affordable housing and the infrastructure that will help unlock its delivery.
Article contributors

  • Director
  • Market Intelligence

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