CBRE’s UK Real Estate Market Outlook 2025 predicts economic recovery will gain momentum in 2025, fuelled by falling inflation and interest rate cuts.
Assuming economic growth of around 1% in 2024, CBRE anticipates the UK will see increased investment opportunities across all property sectors in 2025.
The firm’s head of UK research, Jennet Siebrits, said: ‘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.
‘Our forecasts indicate competitive returns across all property segments, with prime assets expected to deliver the strongest performance. A rise in values, alongside lower interest rates and cost of capital, will stimulate a pick-up in investment of around 15%.’
According to CBRE, the urgency of meeting net-zero targets is driving closer collaboration between occupiers, landlords, investors, and lenders on sustainability. This increased focus on both the transition to net-zero and the physical risks of climate change - like the significant flood risk impacting one in six UK properties - will impact transactions, budgets, valuations, and development strategies.
AI adoption in commercial real estate is predicted to accelerate in 2025, offering significant long-term benefits. The AI sector is already transforming data centres, creating substantial new demand for capacity and specialised infrastructure.
Sector forecasts
The office sector is expected to see continued growth in 2025, fuelled by a stronger economy and increased office employment. However, limited Grade A office supply due to high construction costs and financing challenges will likely drive prime rental growth. Prime rental growth is expected to be around 6% across most UK markets. The flexible office market will also continue to expand in major UK cities.
The industrial and logistics sector anticipates stable occupier demand in 2025, similar to 2024. Limited new construction will keep vacancy rates steady, while prime rents will see more moderate growth. A preference for higher-quality assets will persist, alongside rising demand for larger warehouse spaces, building on the strong market for smaller units.
Retail sales are projected to modestly increase in 2025, thanks to higher incomes and lower interest rates, although online return fees may slow online sales growth. Brick-and-mortar stores will remain crucial. Prime retail space will become scarcer, pushing up rents in desirable areas. Retail parks are poised for strong investment, while prime Central London locations will remain attractive to occupiers.
Strong demand for rental housing will continue in 2025, but limited supply will worsen due to the Renters’ Reform Bill, increased stamp duty on second homes (+2%), and reduced development activity caused by higher financing costs, planning hurdles, and building safety regulations. This imbalance will likely fuel rental price increases.
PBSA assets will also see robust demand, driven by a growing student population and a predicted increase in international students choosing the UK. Supply constraints, however, will lead to a significant shortfall of around 620,000 beds, resulting in robust rental growth, though some markets with more supply may see pricing pressures.
The hotel sector is experiencing a strong rebound, exceeding pre-pandemic tourism levels. CBRE forecasts further growth in 2025, particularly in London, driven by increased international visitors. Falling interest rates are improving investor confidence, leading to a robust and active investment market for hotel properties.
The self-storage sector will remain strong, boosted by increased consumer and business use and a healthy economy. Investor interest is high, with development costs stabilizing. Increased supply is anticipated, reflecting the sector’s growth ambitions and available investment capital.
The UK data centre market, particularly in London (which accounts for 80% of the market), will continue its strong growth in 2025. Despite construction challenges, London’s supply will increase by 17%, driven by hyperscalers and AI companies. However, high demand and limited space will keep vacancy rates near historic lows, below 10%, for a fourth consecutive year.
Increased venture capital funding in 2025 will fuel demand for life sciences lab and office space across the UK. The addition of approximately 222,967 m2 of new lab space aims to address the current supply shortage. Investor activity is also expected to increase as several life science projects near completion.
