Article
Will UK real estate investment activity increase further in 2025?
February 14, 2025 7 Minute Read
Last year saw the first signs of recovery in the UK real estate market following the downturn triggered by the global rise in interest rates. Commercial property capital values stabilised and then began to rise gradually as 2024 progressed, led by the retail and industrial sectors. At an all property level, the CBRE UK Monthly index recorded a total return of 7.7% for 2024, with capital values rising by 1.8%. UK real estate investment volumes also increased from £45bn in 2023 to £54bn last year. This was aided by a notable rise in investment during the fourth quarter of 2024.
While uncertainties remain around the pace of economic recovery and path for UK interest rates, the outlook for UK real estate investment is brighter than 12 months ago. This is reflected in responses to our 2025 European Investor Intentions Survey, which show an increased appetite among investors to transact in 2025. This is replicated among investors that are targeting the UK market. 98% of these respondents expect their organisations to acquire a similar or greater amount of real estate in 2025 relative to last year.
Figure 1: Expectations for purchasing in 2025 relative to 2024 (investors active in the UK)
Furthermore, 88% of investors targeting the UK expect to sell at least as much, if not more, real estate in 2025. This matters since an increase in the pool of both buyers and sellers is needed to facilitate greater liquidity. It also fits with the need among investors to refresh and reposition their real estate portfolios after a period of reduced market activity. As such, we expect more opportunities to be brought to market across all sectors as 2025 progresses.
This includes larger lot sizes, where depth of demand has been limited over the past two years. In 2024, there were just 11 deals in excess of £100m in Central London, compared to a longer-term annual average of around 40. Most of these larger deals (8) were in the second half of the year as a greater weight of capital emerged, and we know of several other large deals currently in the pipeline.
That said, there are still challenges for investment in the year ahead. While we perceive that the bid-ask spread for private real estate assets has narrowed, half of respondents are concerned about a mismatch in buyer and seller expectations, which suggests that price discovery will be ongoing in some parts of the market. Other top concerns are uncertainties around the geopolitical landscape and path for interest rate cuts in 2025. Yet Figure 2 shows that a third of investors believe the real estate market is already in recovery mode, while the majority expect the recovery process to have at least started by the end of 2025.
Figure 2: Expectations on when market activity will recover (investors active in the UK)
Alongside transaction activity, capital raising for real estate investment has been affected by uncertain market conditions in recent years. However, around half of respondents expect their organisations to increase their allocation to real estate in 2025, while another 46% expect it to remain stable. This could benefit managers looking to deploy more capital into an improving market. Core-plus and value-add opportunities are preferred at present, while favourable pricing and an improvement in expected returns were the two reasons cited most often for an increase in allocations.
Industrial & logistics was identified by 36% of respondents as the primary target for purchases in 2025, just ahead of the living sector at 31%. This is perhaps not surprising given the longer-term shift in investor interest towards these sectors, which has seen them take a larger share of UK real estate investment over the last five years. Yet the survey results also indicate that some investors are seeking to increase their exposure to the office and retail sectors, where prime assets still exhibit strong fundamentals.
Figure 3: Most preferred sector for purchases in 2025 (investors active in the UK)
Investors in the UK are continuing to seek opportunities in operational real estate and alternative asset types as well, diversifying their portfolios beyond the traditional commercial real estate sectors. There was increased investment into the hotel, healthcare, and ‘other’ sectors in 2024, and over three quarters of respondents to our 2025 survey indicated that they are pursuing investments in one or more non-traditional sectors. This included real estate debt, as well as investments into sectors such as purpose-built student accommodation, data centres, and life science assets.
Overall, the results are consistent with improving sentiment in the UK real estate investment market, and they suggest that investment activity should continue to increase. However, while the expected returns for UK real estate have improved and pricing is now more attractive, there is still some uncertainty in the wider economic environment. Volatility in bond yields and borrowing costs in recent weeks provides a reminder that we remain in the relatively early stages of recovery. Nonetheless, we expect UK real estate market conditions to continue improving as the year progresses.
Contacts
Temi Alaka
Apprentice Surveyor
