The UK's commercial real estate markets will see a circa 15% increase in investment next year, according to CBRE, while the country will lead the way globally as real estate markets improve, according to M&G Real Estate.
The upbeat predictions are part of two wide-ranging sets of forecasts published separately by the global brokerage giant and the leading institutional investor today.
CBRE said in the UK it expects a continuing economic rebound in 2025, creating the backdrop for a strong recovery for real estate.
In its UK Real Estate Market Outlook 2025, CBRE says that with inflation falling to near-target in 2024 and the Bank of England beginning to cut interest rates, overall the economy has grown by around 1% and with a more stable backdrop, growth should continue next year.
For real estate, CBRE’s Head of UK Research Jennet Siebrits said the company expects improved performance across all property segments with an increase in investment volumes.
“As we close 2024, it is becoming increasingly evident that the market reached a trough this year. All property capital values are showing early signs that they’ve reached a turning point, which is expected to gather momentum throughout the year ahead. We also anticipate a compression in yields in early 2025, driven by continued modest interest rate cuts,” Siebrits said.
She said CBRE is forecasting competitive returns across all property segments, with prime assets expected to deliver the strongest performance.
Investment volumes remained at historically low levels in 2024, Siebrits said, predicting a rise in values, alongside lower interest rates and cost of capital, will drive a pick-up in investment of around 15%. "2025 is shaping up to be a pivotal opportunity for investors."
In terms of broad themes, CBRE reports that with government net-zero carbon targets rapidly approaching, occupiers, landlords, investors and lenders will need to have "greater alignment on sustainability objectives, presenting opportunities for collaboration". The agency anticipates a greater focus on "transition and physical climate risks" in transactions, budgets and valuation. Investors and developers are also increasingly aware of the need to mitigate against physical risk. In the UK, one in six properties is at risk of flooding, with an annual remediation cost of £1 billion.
The use of Artificial Intelligence in commercial real estate will become more mainstream in 2025 too, CBRE says. It says that in the medium- to long-term, the industry is likely to realise substantial benefits from adopting AI into business practices. In the short-term, data centres will be boosted by the expansion of AI, driving a significant increase in demand for capacity and evolving requirements.
CBRE said offices will see continued growth in take-up in 2025, driven by the improved macroeconomic backdrop and an increase in office-based employment. Due to high construction costs and limited debt availability, Grade A office supply remains constrained across the UK it points out. CBRE forecasts prime rental growth of approximately 6% across most UK markets in 2025. The expansion of the flexible office market is set to continue in the larger UK cities.
In industrial and logistics, the stable economic backdrop will mean occupier activity in 2025 remains consistent with levels seen this year. That steady occupier demand and a reduced development pipeline will see the vacancy rate continue to stabilise throughout 2025. CBRE says prime rents will continue to grow, but at a more modest pace than in recent years. Building on a healthy market for smaller assets, CBRE says there will be increased demand for larger lot sizes.
Retail-wise, CBRE expects modest sales growth, driven by an increase in real household income and further interest rate cuts. Physical retail will remain a "core component" of occupiers’ business strategies, while prime space will become increasingly scarce in the year ahead, resulting in continued rental growth in the most attractive locations. CBRE predicts retail parks will lead investment in the sector in 2025 and for occupiers prime Central London assets will continue to be in favour.
In build-to-rent, demand for rental accommodation will remain strong in 2025 but there are continuing supply issues, which CBRE says are being compounded by the Renters’ Rights Bill and the additional 2% stamp duty surcharge on second homes announced in the Budget. The build-to-rent pipeline has diminished in recent months so CBRE predicts the demand and supply imbalance to persist in 2025, underpinning rental inflation.
For purpose-built student accommodation, the rapid growth of the student-age population, along with a forecast recovery in non-EU students choosing the UK for further education, will drive strong demand. Upcoming caps on student numbers in countries including Australia and Canada will also create additional demand to study in the UK, CBRE says. The supply of PBSA will continue to be constrained by several factors, resulting in an estimated shortfall of 620,000 beds across the UK in 2025.
For hotels, CBRE points out that tourism has exceeded pre-pandemic levels in London and the regions this year. It is expecting to see higher levels of inbound overnight stays in 2025, particularly in the capital. Interest rate cuts in the second half of 2024, and the prospect of more in 2025, have boosted investor sentiment and it is expecting a "fluid and active investment market throughout the year as demand for hotel real estate continues to be at the forefront of investors’ strategies".
CBRE says self storage will continue to produce "robust operational performance", thanks to growing consumer and business interest and improved economic conditions. Investor appetite remains strong, with development costs stabilising and there will be increased supply thanks to the ambitions of many players in the sector and the amount of equity targeting the sector.
The data centre market in the UK will continue to grow strongly in 2025, notably in London, which accounts for approximately 80% of the UK market, CBRE says. Despite challenges in delivering new facilities, London’s supply is projected to increase by 17% to meet demand from a growing number of "hyperscalers and AI providers". With strong demand and limited space, availability in London is expected to decline for the fourth consecutive year in 2025, keeping the vacancy rate below 10%, an historically low figure.
In life sciences, CBRE expects venture capital funding to increase in 2025, which will drive demand for lab and office spaces as companies seek growth opportunities across the UK. Approximately 2.4 million square feet of new lab space is set to enter the market in 2025, CBRE predicts. It says the investor market is anticipated to pick up.
Global outlook
M&G's Global Real Estate outlook, also published today, finds that the UK in particular has "navigated a prolonged period of uncertainty" and emerged with renewed economic momentum to create attractive opportunities for investors to increase allocations to its real estate. It therefore expects the UK to lead commercial property recovery globally.
It says the four themes expected to drive returns for investors across the world in 2025 are: structurally undersupplied sectors positioned for strongest growth; a mixed but improving picture across Europe; stock selection set to dominate sector dynamics; and Asia-Pacific returns to growth.
M&G reports that structurally undersupplied sectors are positioned for the strongest growth. Here it highlights the UK’s supply backlog of 4.3 million homes and house prices close to historic highs, and says demand for more affordable accommodation is continuing to grow, while private investment to unlock housing delivery is critical.
It says while rental growth in the urban multilet industrial sector in the UK is unlikely to return to the levels seen over the past few years, a "critical undersupply" of modern, high-quality space in core markets will also "sustain investor appetite".
Elsewhere in Europe, it sees a mixed but improving picture that is more nuanced than that in the UK. Southern Europe is likely to continue its economic outperformance, while rate-sensitive markets such as the Nordics and Netherlands will be "beneficiaries of tempering inflation" as global investors hunt for exposure to markets enjoying a relatively low cost of finance.
Residential rental growth is expected in most cities due to constrained supply and low office vacancy rates in central business districts, which it puts at 4.6% versus a city average of 8.1%. And that is improving rental prospects here over secondary sub-markets.
"Brown-to-green value-add strategies" present opportunities to create higher-quality, sustainable stock.
Real estate debt is also offering prospects for "attractive risk-adjusted returns", especially given lower capital values. Retrenchment by traditional lenders, set against a substantial refinancing requirement, sets the scene for institutional capital to step in, M&G suggests.
At a global level, investors seeking strong returns from the retail or office sectors will need to emphasise "discipline and careful stock selection" as the market "increasingly bifurcates" in favour of the best-located, highly sustainable and amenity-rich buildings, M&G says.
Dominant regional retail schemes are expected to offer improved rental growth as occupiers with strong covenants return. Prime grade A office assets are seeing strong interest from occupiers and long-term capital sources as "growth prospects for the highest quality assets outweigh fading concerns about the future of the office".
Asia-Pacific is set to play a larger part in the strategic asset allocation of global real estate investors, seeking to tap into a diverse market with attractive economic fundamentals, M&G suggests. Deal volumes were up 28% year-on-year in 2024 and more attractive opportunities are expected to emerge thanks to sellers needing to refinance assets in a higher interest rate environment.
Cities are becoming denser in line with the steady rise of inward migration, providing urban investment opportunities in areas such as Tokyo multifamily residential. The living sectors in developed Asian markets are expected to see increasing interest next year, M&G predicts.
Martin Towns, deputy global head of M&G Real Estate, said in a statement: "As we enter the new property cycle, global investors are recalibrating their portfolios with increased optimism and a keen eye on emerging trends and evolving dynamics. With capital values having stabilised and a recovery phase underway in many global markets, increased optimism and easing interest rates are setting the scene for a rise in buying, selling and lending opportunities.
"Sectors once considered as alternative are now deemed mainstream by many institutional investors. We expect the living sector to be among the main beneficiaries as investors move to take advantage of attractive entry points and structural tailwinds, underpinned by supply constraints and increasing demand."