UK Real Estate Market Outlook 2025

In 2025, we expect a more stable rate of inflation, broadly or slightly above the target. This, coupled with 100bps of base rate cuts, will be positive for the economy and we forecast growth of 1.8%. Government investment may surprise on the upside, while changes in National Insurance Contributions (NICs) could push up prices and reduce job creation.

UK real estate capital values look poised to rebound in 2025, with most commercial sectors reaching the trough in values throughout 2024. Falling inflation and lower debt costs will support improved investment returns and promote increased real estate transactions next year.

With the dawn of a new government and nearing net zero targets, 2025 will be pivotal in UK real estate’s transition to net zero. We expect a reset on sustainability-related policy, increasing disclosure requirements, and a heightened focus on transition and physical climate risk. This will require industry stakeholders to tighten their alignment on sustainability objectives. 

As interest rates continue to come down, liquidity for larger lot size deals will return in 2025. Foreign investment is also expected to return to the usual level in the Central London market. Take-up will see continued growth, and prime rental growth is forecast in all markets.

Occupier demand in 2025 will remain broadly consistent with the levels seen this year. Vacancy rates are expected to stabilise, and moderate prime rental growth will be achieved for best-in-class assets. Positive investor sentiment and a broadening buyer pool will increase investment volumes and see yield compression. 

In 2025, the London market is expected to reach an all-time high for new supply delivered in a year. The new supply delivered will be greater than take-up, and vacancy in London will be above the record low reached in 2024. Pricing will continue to rise, driven by higher build costs and strong demand.

We expect to see continued modest growth in retail sales in 2025, driven by improved household finances. Demand will remain strong for prime retail locations, and low vacancy rates may push occupiers to consider secondary locations. Retail Parks are expected to continue to lead investment into the sector, but Shopping Centre activity is likely to see an uptick.

Living: Residential Sales

Falling interest rates have led to an improved outlook for the residential sales market. Mortgage rates are projected to continue to fall in 2025 which will translate into a further recovery in sales volumes and house prices. However, despite Labour’s planning reform, new housing supply will remain muted and below target.

Living: Build-to-Rent

The supply and demand imbalance across the rental market will persist in 2025. Albeit a lower level of tenant demand means this won’t be as acute compared with recent years. We also expect rents to continue rising, but at a slower rate and more in-line with the long-run average in 2025. A stable economic and political backdrop will also underpin investment into the BTR sector.

Living: Affordable Housing

Demand for affordable housing will remain strong and investment activity is expected to be robust in 2025. In addition, positive legislation for social rents will buoy investor sentiment. However, investment into the sector will continue to be reliant on For-Profit providers, which are unencumbered by legacy stock.

Living: Purpose-Built Student Accommodation

The PBSA sector will continue to be defined by an acute supply and demand imbalance, not least because upcoming caps in other countries will drive international student demand in the UK in 2025. The supply of beds will not keep pace with this demand. As a result, rental growth is forecast to be strong and in-line with the long-run average.

Operational Real Estate: Senior Living

Demand for age-appropriate housing continues to grow, however a shortage of suitable properties is constraining uptake where demand outweighs supply. Strong demand fundamentals indicate robust performance amongst the wider residential sector.

Operational Real Estate: Hotels

In 2025, the hotel industry is expected to maintain strong performance. However, the growth in Revenue Per Available Room (RevPAR) will be driven through increased occupancy from rising corporate demand, rather than Average Daily Rate (ADR) increases. With inflation stabilising, multiple base rate cuts, and a favourable debt market, hotel operators are anticipated to enhance profitability and counterbalance ongoing inflationary pressures.

Operational Real Estate: Healthcare

Healthcare investment volumes will continue to increase in 2025 following a surge in activity in H2 2024, driven by increasing demand and needs. Strong operational performance, attractive lease features, and improving investment market conditions for a growing buyer pool continue to attract investors to the sector.

Operational Real Estate: Leisure, Food & Beverage

Despite a squeeze on consumer spending, the stable trading and operator environment will provide the backdrop for improved performance and increased activity in the coming year. Demand for experiential leisure continues, with people prioritising their disposal income on these out-of-home pursuits, which bodes well for operators and investors in 2025.

Operational Real Estate: Self Storage

The UK self storage market continues to gather positive momentum with multiple large scale platform transactions expected over the next 12 months. Demand for the sector remains at an all-time high, driven by resilient trading performance and a low level of supply (less than 1.0 sq ft per capita). As customer awareness of the service offering increases, demand is expected to rise even more, positioning it as one of the highest projected urbanisation trends in Europe.

Operational Real Estate: Roadside & Automotive

There is a renewed sense of optimism across the Roadside & Automotive sector as investment activity gradually increases and the electric vehicle sector continues to grow rapidly.

Post-election stability in the UK has revitalised VC activity and that is expected to continue into 2025, driving demand for lab and office spaces. Rental rates are likely to increase given the continued supply and demand imbalance, particularly with new purpose-built facilities. The Government's strategic focus on life sciences, including increased funding and Horizon Europe associate membership, coupled with the Mansion House Compact's progress, should all contribute to sector optimism. In tandem, the lab development pipeline will deliver significant levels of new space in 2025, namely in the Golden Triangle and Manchester, signalling a dynamic shift in the real estate investment landscape for life sciences.