UK economic outlook

Activity

Economic growth surprised on the upside during February, recording a strong 0.5% expansion against a consensus of 0.1%. Although monthly figures can be volatile, any growth is welcome following a lacklustre end to 2024. Following US tariff announcements in April, we expect business sentiment in the UK to suffer as 10% tariffs are implemented. Although the UK’s composite Purchasing Managers’ Index (PMI) registered 52 in March, a six-month high and above the neutral growth threshold of 50, fears of lower growth will feed through to business confidence and decisions. As a result, business activity will almost certainly be more anaemic, despite the UK not suffering the worst of direct tariff measures. 

Inflation

The annual Consumer Price Index (CPI) decreased from 3% to 2.8% in February [1]. Although the headline figure was softer than economists’ expectations, inflation remains well above the Bank of England’s (BofE) target of 2%. Services inflation also remains sticky at 5%. Further cost pressures from price increases of administered utilities, and National Insurance and National Living Wage changes, will test the economy’s ability to absorb costs. Additionally, a rise in global tariffs could increase external pressure on goods and supply chains, raising input prices across sectors. 

Policy

The BofE held rates at 4.5% in February in an eight-to-one vote. While the BofE initially reiterated a gradual-yet-cautious approach to further rate cuts, recent global tariff announcements have pushed investors to price in a greater chance of swifter and more decisive cuts. We expect three further cuts this year to bring interest rates to 3.75%; the market’s expectations are volatile but are more closely reflecting our forecasts at the time of writing. Although there is considerable uncertainty over monetary policy as global headlines surge, a consistent easing cycle is looking more likely as a general consensus.

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

UK real estate market overview

UK real estate achieved a healthy 8.1% total return during the 12 months to February 2025 [2], according to the MSCI Monthly Index. The favoured sectors of retail and industrial led the index, with the hotel and residential sectors also outperforming. Performance was driven by income returns, as a lack of yield compression has been evident across the market. All-Property capital values are healthily wading into positive territory at 2.1%, primarily driven by robust rental growth feeding through. For context, over the year to February 2024, capital values experienced a 4.9% annual decline; and over the year to February 2023, values fell by 17%. 

Since income returns drove the majority of performance last year, MSCI’s Quarterly Index – which is generally constructed of lower income-yielding assets – posted lower relative total returns of 5.5% during 2024 [3]. The favoured sectors of retail and industrial both led the quarterly index at 8.3%. Office returns were exactly neutral over the year, as capital value declines slowed to -4.6%. Polarisation remains strongly in place here, with best-in-class assets driving performance. 

Capital values had a story of two halves over 2024. All Property gave -0.6% away over the first six months of the year, but posted a gain of 0.4% over the following six months. Industrial and retail were the primary drivers, accelerating to 3.6% and 2.1% growth towards the end of 2024, respectively. Some yield compression was evident in prime assets within these segments, but it was otherwise notably absent from the wider market, as investors waited for additional rate cuts. 

There is an outside possibility of capital values softening, as global growth is threatened by tariffs and trade escalations. As occupiers and investors hold back on decisions, sectors with higher availability rates like logistics and offices could be more exposed in certain submarkets. Additionally, discretionary-heavy sectors, including hotels and leisure, will likely see a pullback in demand, especially from international sources.

Investment volumes have taken a step back over the first three months of the year, as total transaction volumes fell 33% year-on-year [4]. Just £8 billion was transacted over the first quarter of 2025, down from nearly £20 billion over the prior quarter. Initial uncertainty around macroeconomic and geopolitical tensions held volumes back over the first quarter, and tariff announcements from the US will ensure more investors sit on their hands in the short term. 

UK real estate market trends

Offices

The office sector is acting as less of a drag on UK real estate, as the sector’s fundamentals recover to a more neutral footing. According to JLL data that is averaged across London and the ‘big six’ markets, annual take-up has been showing signs of a more normalised leasing cycle [5]. In the fourth quarter of 2024, quarterly take-up even surpassed the pre-pandemic average. That said, net absorption across these markets has been more downbeat as occupiers leave secondary space behind. After posting an exceptionally negative year of net absorption over 2023, figures recovered over 2024 into marginally positive territory and London led the way.

Following the latest global tariff announcements and given business sentiment is closely tied to office performance, there are potential risks tied to the office sector. Rising vacancies, slower rental growth, and lower capital values could be seen across certain submarkets should growth be seriously affected.

Average capital values have recovered from their deep corrective territory and declined just 0.4% over the final quarter of 2024, according to MSCI’s Quarterly Index. Looking at the first two months of 2025 using MSCI’s Monthly Index, declines appear to have slowed further as values were nearly flat at -0.1%. In turn, this has nudged total returns into positive territory over the second half of 2024, as rebased income returns do some heavier lifting. Future performance in the sector and, crucially, outperformance against All-Property returns will be driven by the upper echelon of offices in favoured submarkets. Secondary assets and locations will erode relative value, suffer from longer voids, increased concessions, and a lack of rental growth. 

Although crucial for long-term office investment volumes, large lot sizes are still off the menu for investors. Despite recent headlines of possible acquisitions, the largest deals recently have remained well below £200 million. Lending is available for prime assets, but it seems confidence in the sector is focused within sub-£100 million lot sizes, for now. 

Industrials and logistics

Despite remaining a favoured sector, the fundamentals of industrials and logistics are shifting towards more nuanced levels of performance. Pockets of stickier vacancy rates are cropping up as cost pressures force a level of occupier consolidation. Meanwhile, rental affordability is acting as a buffer in certain markets. Reshuffling of global trade could also affect supply chains and demand from certain markets, raising concerns for global logistics occupiers. For the UK, this could be a net positive for logistics, should trade break down entirely between the US and China. This is very much a moving picture, though, which would take time to feed through.

According to CoStar data, net absorption was sharply negative over 2024, as space was returned and demand remained below the long-term average. As a result, national availability has risen to its highest level since 2015 (5.6%) and is expected to remain elevated during this year as deliveries are absorbed. Availability within larger-size bands is rising more quickly than those below 100,000 square feet. Under-pressure retailers and third-party logistics providers have vacated large warehouses, while demand for smaller warehouses in dense urban areas is proving more competitive. That said, construction starts have dropped off significantly and should remain low while demand rebalances.

Multi-let estates with asset management angles are still popular among investors. We also see the potential for rebased long-income-producing assets to generate more investor interest as defensive real estate looks more attractive. We expect platform deals to remain a large part of the industrial market as investors seek scale.

Retail

Retail returns are being supported by rebounding consumer confidence and expectations of a strengthening economy. According to CoStar, national take-up increased by 15% over 2024 [6], as shopping centres continued their revival and discounters expanded. Retail parks had strong leasing demand and were one of the only segments over 2024 to see yield compression. A range of investors drove the competitive bidding processes. 

Retail provided a total return of 11.3% over the 12 months to February, according to the MSCI Monthly Index. Retail parks and shopping centres drove the sector’s performance, aided by their relatively high income returns. The former had the strongest capital value growth of retail sub-segments at 5.9% during February 2025, compared with 2.1% for All Property.

According to Office of National Statistics (ONS) data, retail sales values grew 3% over the year to February [7], while volumes were up 2.2%. This implies 0.8% inflation, which is far lower than the reported 2.8% for headline CPI. The figure indicates that retailers aren’t fully passing on costs to consumers. This could begin to change as National Insurance and National Living Wage increases filter through, although it’s likely job losses and increasing automation will serve as a counterweight. Real annual wage growth remains positive at 2.1% (over the period of November 2024 to January 2025), supporting the consumer’s financial buffer.

Certain retail sub-segments will be more susceptible to pressures, despite a healthier consumer. Supermarkets are battling against tight profit margins. In order to maintain some sort of profitability, the likes of Tesco, Morrison’s, ASDA, and Sainsbury’s all announced staff cuts ahead of labour-cost increases. Meanwhile, Aldi and Lidl are gaining market share as their UK expansion plans ramp up.

Living

Living had a strong 2024, continuing its momentum as one of our sectoral favourites and highlighting the evolving maturity of the living market. According to the MSCI Monthly Index, the sector posted a robust 8.8% total return over the 12 months to February 2025. According to the latest data, the ONS reports rental growth of 8.1% across the wider private rented sector, beating headline inflation (2.8%) and rising house prices (4.9%). The build-to-rent (BtR) sector is experiencing strong investor interest, as a result, with over £5 billion invested in the 12 months to February – a 13% increase on the previous year. In addition, the relatively nascent single-family home (SFH) sub-segment is growing in popularity; over one-third of total BtR investment over 2025 was for houses to rent, up from 2% in 2020 [8].

BtR had a strong year for supply, as more than 20,000 units were completed [8], according to Knight Frank research. This brings the UK’s total operational stock to more than 120,000 units, with a further 50,000 units in the near-term pipeline. There are signs of moderating rental growth across certain BtR markets. London, for instance, saw asking rents remain fairly flat across 2024, after seeing 18% rental growth in the previous year [9], according to Realyse data. Real wage growth will go some way to support affordability, but we still expect rents to moderate, as cost pressures remain relevant in the coming months. Still, we remain supportive of the sector, given the stark housing undersupply in the UK and the relative immaturity of the BtR market.

The purpose-built student accommodation (PBSA) segment also remains favoured by investors in markets driven by higher-tariff universities. This is because of strong rental growth and better occupational performance. Higher-tariff universities don’t mean risk-free, though, as shaky international student demand and mismanaged finances have left some high-quality institutions exposed. Most recently, the University of Dundee, which sees around 70% of total fees funded by international students, announced a £35 million black-hole in funding. It will cut around 700 jobs, as a result. Overall, university intake remains strong, though, with overseas applications showing a modest recovery. We still support the sector, but we stress a focus on quality institutions. We also recommend in-depth analysis of university finances and sources of student demand, especially given cost pressures.

Outlook for risk and performance

We still expect UK real estate to outperform, despite macroeconomic noise, but not without some added risk. At this point, the risk of continued global tariffs is damaging for growth expectations in the UK. If they escalate further, we could see greater impacts across sectors due to supply chain issues, sustained inflationary pressures, and much lower global economic growth.

Given the nature of our services-based economy, we escape the majority of direct tariff impacts, but secondary effects could still be damaging. Still, we don’t expect to see widespread capital value declines, and rental growth is being supported by a shrinking construction pipeline. This allows rebased income returns to provide much of the returns over the near term, with the upside potential of an accommodative monetary policy path during the second half of 2025. However, this will have to balance with lower business confidence and a lack of decisions. 

Crucially, there is far less sectoral differentiation present in our outlook. Instead, we expect asset-specific drivers and asset-management angles to provide the required alpha to outperform. We expect investment volumes to remain quiet, given the hugely uncertain environment. In a situation where swifter rate cuts feed through, pricing could become more competitive for prime assets with more defensive cashflows.