UK real estate market outlook Q4 2025

UK economic outlook

Activity

Although the first half of 2025 had stronger-than-expected growth of 1.1%, initial estimates over the summer suggest this shine has dulled. Economic headwinds are dominating the domestic environment, with fiscal concerns once again at the centre of attention ahead of the Autumn Budget. Concerns around productivity are at the forefront of the Office for Budget Responsibility’s forecasts, which highlight the fiscal consolidation required. An estimated £30 billion of fiscal consolidation is needed to restore a shallow level of headroom against Labour’s main fiscal rule. The majority of this will have to come from tax increases, as spending cuts have proven too politically challenging.

Inflation

Inflation is proving stickier than expected, as the annual headline rate to August came in at 3.8%, nearly double the Bank of England’s (BoE) target rate. Food inflation has been strong during this period at 5.1%, an 18-month high. That said, underlying inflation pressures have eased, and we expect strong base effects to lead to moderating inflation over the first half of 2026. Prevailing labour market weakness should contribute to a softening in inflationary pressure, although this may translate into a short period of negative real wages while inflation is elevated.

Policy

Although underlying inflation pressures have eased and wage growth is slowing, the BoE remains cautious in its approach to monetary policy. The policy rate stands at 4% after a 25 basis-point reduction in August, the second of 2025. We narrowly expect the BoE to cut rates once again in November, followed by multiple cuts next year in response to a weakening labour market. In response to the pressure on gilt markets, the BoE slowed the pace of quantitative tightening from £100 billion annually to £70 billion at its September meeting. However, we still expect macroeconomic headwinds, inflation volatility, and geopolitical uncertainty to put pressure on term premia, leaving the 30-year treasury largely unchanged. 

 

Source: Aberdeen, October 2025
Forecasts are a guide only and actual outcomes could be significantly different.

 

UK real estate market overview

Total returns over the 12 months to August are holding firm at 8.7% [1]. A challenging domestic environment is putting a damper on an otherwise productive start to this real estate cycle. Values have bottomed-out, aside from structurally out-of-favour segments and obsolete assets. Paired with healthy rental growth and a dwindling construction pipeline, income growth remains in the driving seat. The high-yielding shopping centre segment led annual returns at 13.2%. However, as one of the only segments to post capital growth, the West End and Midtown offices led at 1.1% a month, or 8.2% annually. The polarisation in offices is still evident, though, as the sector more widely lags all property at 3.8% annually. 

While income is the dominant contributor to returns, the spread between sectors has narrowed significantly, and capital growth is playing a more sustained role across a growing number of sub-sectors. Significant yield compression is yet to be seen, given restrictive monetary policy and more reserved investment activity. However, all property still recorded 2.7% of capital value growth in the 12 months to August, aided by positive rental growth. A broad lack of supply is supporting rental growth performance, particularly for higher-quality assets. 

After a poor start to the year, investment volumes recovered up to the end of September to stand at £29 billion [2]. Although this still represents a 16% year-on-year (YoY) decrease, volumes are similar to those during 2023, and they have been achieved in the face of stern macroeconomic headwinds. Cross-border capital remains active in the UK, particularly from the US, and there are noticeable increases from Canadian and Australian sources. However, as the Autumn Budget falls so late in the year, bringing with it a fresh blanket of uncertainty for investors, we expect subdued activity up to the end of 2025. 

UK real estate market trends

Offices

Sentiment towards offices is improving, particularly in central London. The core City and West End submarkets remain favoured by occupiers, while peripheral markets struggle with higher vacancy rates and softer rents, particularly for assets lacking suitable transport links and local amenities. Net absorption across London has been positive over the first three quarters of the year, as occupiers reassess space requirements [3].

Despite our expectation that completions over the next year may reach their highest level in nearly two decades, the immediate concern in the occupational market is securing the right space in the right location. As a result, annual prime rental growth in the tighter West End submarket was 17.9% during the second quarter, while the City recorded 9.1% over the same period [4]. The importance of location is also driving occupational tension in slightly secondary spaces in prime locations. 

The story in the regional markets is still more nuanced. Construction shortages persist across the ‘big-six’ markets. This has led to strong rental growth for prime space, following robust leasing demand, particularly in Bristol and Edinburgh. Out-of-town offices and business parks are struggling with high vacancy rates and declining capital values. That said, sector-wide declines in capital values are slowing, with only 1.6% falls in the 12 months to August. The West End and Midtown have had 10 consecutive months of capital growth, the latest of which was 1.8%. 

Central London investment activity for this year is trending at around half of the long-term average – £6.5 billion up to September [2]. A lack of commitment to large lot sizes is holding back volumes, although there are signs this sentiment is beginning to shift. There is also encouraging evidence of increasing interest from a diversifying pool of cross-border capital, namely Japanese and Australian investors. Investment in the regions remains more subdued, although Bristol and Edinburgh look most favourable.

Industrial and logistics

Headline performance across the industrial and logistics sector remained strong at 10.4% over the 12 months to August [1], although signs of caution persist. A slowdown in leasing is permeating segments of the market; most notably, retailers and third-party logistics operators are scaling back. This is contributing to near record-high sublease availability in distribution warehouses. UK industrial vacancy rates have increased to 5.5%, their highest level in a decade [3]. As a result, market rental value growth is slowing across the sector, although this is polarised by quality and location. 

Poorer-quality units have much higher vacancy rates, with occupiers prioritising quality and energy efficiency as operating costs increase. Once returned, reletting these units comes with substantial capital expenditure (capex) budgets and increased incentives. Small- to mid-size industrial units are faring better in general, particularly in competitive south-east submarkets. However, affordability concerns are still weighing on occupier movements, as rents have increased significantly. This is compounding the popularity of in-demand and well-located submarkets, while less favourable submarkets have increased availability and a lack of competitive tension.

Retail

Consumers are practising caution as components of inflation remain sticky. Alongside a weakening labour market, consumer confidence has stumbled in its recovery, with GfK’s consumer confidence index registering -19 in September, down from -15 one year prior. As food inflation hits 5.1% [5] and as grocery retail volumes plateau, the household savings ratio (a measure of disposable income) has climbed to a 15-year high. While this highlights consumer caution, these savings could provide firepower for increased spending when economic conditions improve.

The retail sector posted strong annual returns of 10.6%1 over the year to August, owing to a larger proportion of its income performing well. Shopping centres outperformed over the 12 months to August at 13.2%. Polarisation is evident in this sub-segment, where rental growth and subsequent capital appreciation are more evident in the top quartile of assets. Elsewhere, returns for retail warehousing have slowed (10.9% versus a peak of 13.2% at the start of 2025), as capital value growth has moderated.

A number of large prime shopping centres have transacted over 2025, with foreign capital and domestic real estate investment trusts leading the charge. This emphasises the polarisation in the sector, as secondary assets have little traction against increased capex and operational costs.

Living

Fundamentals in the living sector are looking more nuanced. A chronic lack of supply has underpinned the sector’s performance, which posted 10% returns in the 12 months to August [1]. However, the sector is increasingly being challenged by affordability constraints in parts of the market. These constraints vary regionally and they have been compounded by private landlords exiting the market. This has led to a removal of stock from the private rented sector. Annual rental growth across the UK up until August was slightly negative at -0.1%, compared with a five-year average of 8.3% [6]. At the same time, landlord instructions (a key rental index) are at their lowest reading since 2015, as uncertainty surrounds the Autumn Budget and possible tax increases [7].

The build-to-rent (BtR) sector would be in a prime position to capitalise by providing institutional living assets. But stringent building regulations mean the construction pipeline is staring down a rapid decline. Less than 6,000 BtR units have been submitted for planning approval year to date, down from over 25,000 units submitted in 2022. As a result of constrained supply, rental growth is rising across the sector. But it’s more limited by wage growth and affordability limits in particular submarkets.

Financial health at universities has been making headlines this year. This is primarily a result of a funding model that relies too heavily on more volatile flows of international fees. In some brief respite for the sector, there was a moderate uptick in overall acceptances for international students for the 2025/26 academic year, according to the latest UCAS clearing data. There is a clear flight to quality, though, as both lower- and medium-tariff [8] universities have had YoY declines of 11.9% and 4.5%, respectively. Higher-tariff acceptances have grown 13.7% [9]. There are justified concerns around purpose-built student accommodation that’s attached to less favourable universities. As a result, we emphasise more caution towards the sector.

Transactional evidence has been sparse year to date, down around 25% (YoY) up to September [2]. Despite a number of large portfolios being actively marketed, there has been much less appetite for these transactions this year.  

Outlook for risk and performance