Against the Current: UK Real Estate Charts a Stable Path
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Key Insights - Q1 2025
- Occupational markets are recovering, with leasing activity picking up across offices, industrial, and retail. Retail rents are improving, especially out-of-town, and shopping centres who saw their strongest monthly rise since 2008. The South East office market reflected this momentum, with Q1 take-up reaching 1.2 million sq ft, up 39% on Q4 and the best start to a year since 2008.
- Investment momentum is building, even if Q1 volumes were underwhelming. As macroeconomic uncertainty persists, capital is continuing to flow into commercial real estate, reaffirming its role as a relative safe haven in volatile markets.
- Supply is tightening in key sectors, particularly in industrial, healthcare and office markets. With speculative development slowing and new stock delivery dipping, competition for well-located assets is expected to intensify through the year, supporting further rental growth.
The start of 2025 bought renewed hope of the early stage recovery for the global economy, until the US ‘Liberation Day’ triggered mass market instability, with proposed tariffs sparking widespread uncertainty throughout the global economy. As a result, global growth forecasts were downgraded, with the IMF now expecting 2.8% growth in 2025 and 3.0% in 2026, well below the average from 2000-2019 of 3.7%.
UK Macro: Limited Exposure, Mild Slowdown
In a global context marked by renewed uncertainty, the UK is positioned to offer relative stability. As one of the first major economies to secure a post ‘Liberation Day’ trade agreement with the US, the UK has gained valuable clarity at a time when others face disruption. Oxford Economics forecasts GDP growth of 1.0% in 2025 and 0.9% in 2026. While modest, this outlook underscores the UK’s resilience and the stabilising impact of early trade clarity amidst an uncertain geopolitical backdrop.
Real Estate Investment: Volumes Sluggish, Confidence Emerging
UK commercial real estate (CRE) investment totalled £8.1bn in Q1 2025, down 45% from Q4 2024 and 28% year-on-year. Offices remained the most active sector, with £2.2bn in investment, followed by the Living Sectors (£2.0bn), Logistics (£1.7bn), and Retail (£1.4bn). Notably, the Living Sectors were the only ones to see year-on-year growth.
Cross-border capital continues to play a vital role, accounting for 53% of total CRE volumes. While foreign investment was 35% lower than the previous quarter, momentum is building again. Japanese investment surged by 59% over the 2024 total in Q1 alone, and Australian capital saw a dramatic 234% increase.
Sector fundamentals are gradually improving. According to MSCI, property income has grown by over 5% since early 2023. Capital values, having rebounded from a 21% decline, are now at their highest since Autumn 2022. With interest rates showing signs of stabilisation, the backdrop for UK CRE is becoming more favourable as investors seek safe haven assets for capital deployment.
Offices: Core Markets Attract Renewed Interest
City and Southbank: Investment rose 33.5% in Q1 to £968m, buoyed by sovereign wealth and institutional activity. Abu Dhabi’s Modon Holding took a notable 50% stake in a major Broadgate development. Institutional investment more than tripled quarter on quarter, and
APAC buyers focused on core, lower-risk assets. Despite total take-up falling to 1.5m sq ft (down 29.4% from Q4), demand for prime and refurbished space remains strong, comprising two thirds of activity. Prime rents also increased, reaching £100 per sq ft in the City and £90 in Southbank.
West End: Investment reached £1.6bn, up 27% from the previous quarter and well above the long-term average. Larger deals dominated, with transactions over £100m making up nearly 72% of volumes. Norges Bank led with major stakes in the Covent Garden and Mayfair estates. Strong occupier demand is now extending beyond the traditional West End core, with major lettings in Knightsbridge, Victoria, and Marylebone reflecting a widening search for quality space.
The South East office market started 2025 with strong momentum. Leasing activity rose in Q1, with take-up reaching 1.2 million sq ft which is up 39% on Q4 2024 and marking the strongest first quarter since 2008. While investment volumes dipped slightly, the pipeline tells a different story. Around £230 million in office stock was under offer at quarter end, hinting at a likely rebound. A further £456 million in assets on the market also signals growing vendor confidence and sustained investor appetite.
Industrial and Logistics: Activity Picks Up Despite Pricing Gaps
Investor sentiment continues to improve, with £1.6bn invested in industrial and logistics assets in Q1, a 9.6% year-on-year rise. Though deal flow is still hampered by pricing mismatches, the capital waiting to be deployed remains substantial. Demand remains healthy, with 8.3m sq ft taken up in Q1 and an encouraging leasing pipeline. Vacancy has stabilised at 7.3%, and second hand supply tightened for the first time in two years.
Retail: Robust Sales, Tentative Recovery in Investment
Retail sales defied seasonal expectations, with values up 2.9% and volumes up 2.0% in March. Shoppers benefited from slowing inflation and strong wage growth (+5.6%), pushing household spending above pre-pandemic levels in many regions.
Retail investment volumes were £1.3bn in Q1, below the five-quarter average due to Q4’s unusually high total. Retail warehousing remained dominant, making up 68% of activity. Capital values saw a sharp rise in March (+3.6%), marking a turnaround after two years of decline. Out-of-town retail recorded its highest monthly rental growth since 2007, while shopping centres posted their strongest rental rise since 2008.
Data Centres: Government Strategy Spurs Investment
The UK government’s AI Opportunities Action Plan has energised the data centre sector, with £14bn in new project commitments. Highlights include Nscale’s £2.5bn investment in Essex and Vantage’s 10-building campus in Wales. Combined with ongoing expansions, the UK’s total development pipeline has reached 4.5GW, requiring around £60bn in investment, underscoring its position as a European leader in digital infrastructure.
Life Sciences: Bright Start, But Funding Gaps Remain
Venture capital funding in life sciences hit £1.1bn in Q1, the strongest quarter since 2021. However, much of this was concentrated in just two firms: Isomorphic Labs and Verdiva Bio. AI continues to play a growing role in the sector, with six of the top ten deals focused on AI-driven innovation.
The domestic finance ecosystem remains fragile, and early-stage companies still face challenges in securing stable funding. Nonetheless, interest from institutional investors is growing, with new backing seen for Oxford Science Enterprises and Northern Gritstone. Policy momentum is building too, with recent government efforts addressing regulatory delays and signalling stronger support for the sector's growth.
Healthcare Supply Continues to Lag
Since our last review, bed numbers have increased by just 86, partly due to revised data and more detailed analysis separating new beds from reopened ones. This limited growth highlights the ongoing challenge in addressing future shortfalls. More strikingly, while bed supply has risen only 2.9% over the past decade, the over-65 population has grown by around 20.7%, underlining the lack of meaningful expansion.