Solid foundations offer upside in UK commercial property

Geopolitical risks remain a persistent and unpredictable feature of the operating environment with the war in Ukraine, US President Donald Trump’s erratic policymaking decisions and recent unrest in Iran and Venezuela highlighting the continued potential for future shocks.

Against this backdrop, the UK residential market is expected to remain broadly stable over the course of this year. Easing monetary policy and resilient household balance sheets should provide support to house prices and underpin steady levels of transactional activity. However, affordability constraints, due to house price growth outpacing wage growth, may limit the pace of recovery.

The outlook is also increasingly constructive for commercial property. Improving financing conditions, increased liquidity and greater pricing clarity are providing a more supportive backdrop for transaction activity. With interest rates on a downward trajectory and lender appetite continuing to recover, commercial real estate is well positions to outperform, particularly in sectors characterised by strong tenant demand, constrained supply, and resilient rental growth.

The improving financial conditions are coinciding with more disciplined investor strategies. Following an extended period of repricing and subdued transaction volumes, capital is returning selectively, targeting assets were income resilience and rental growth are clearly evidenced. As a result, UK commercial property is arguably on its strongest footing since 2021.

Living sector: the engine of activity

The Living sector continues to lead activity. Structural undersupply, favourable demographics and the defensive nature of income continue to attract institutional capital. Build-to-rent (BTR), co-living and purpose-built student accommodation (PBSA) remain the most active lending sub-sectors and are well positioned for further growth as borrowing costs continue to fall.

Industrial and logistics: market leading conditions

Industrial and logistics assets continue to benefit from some of the strongest market conditions in UK real estate. Although rental growth has slowed from the exceptionally high levels witnessed in recent years, supply remains structurally constrained, particularly for well-located, modern assets with strong ESG credentials. Occupier demand from e-commerce fulfilment centres, inventory nearshoring and businesses holding higher stock levels to ensure supply-chain resilience, underpins income and ensures low vacancy rates.

From an investment and lending perspective, the sector remains highly liquid. Prime logistics assets, supported by long-term lease agreements and strong covenants, continue to attract domestic and international capital interest. The improving availability of debt is enhancing transaction viability, particularly for stabilised assets and selective development opportunities where pre-lets or clear leasing strategies are in place. As borrowing costs continue to ease, logistics is expected to remain a core allocation for institutional investors.

Offices: a bifurcated recovery

Prime Central London offices

Best-in-class, ESG-compliant offices in prime central London locations are benefitting from a notable flight to quality. Occupiers are favouring amenity-rich, sustainable spaces as it supports talent attraction and retention. Constrained supply of new Grade-A space is providing additional support.

Investor interest is picking up, particularly for prime assets with refurbishment potential. This is consistent with our recent research which found that 46% of global investors are prioritising refurbishment or repositioning strategies over new development.

Improving financing conditions and increased pricing clarity are supporting renewed deal flow. However, secondary and non-compliant stock continues to face structural headwinds.

Prime regional offices

Acute shortages of Grade-A space and thin development pipelines have supported strong rental growth in the prime regional office market, including Manchester and Bristol where rents have increased by 6–10% per annum. Robust occupier demand, boosted by a strong professional services ecosystem outside London and an ongoing flight-to-quality continues to favour modern, well-specified buildings.

Looking ahead

Positive sector-specific dynamics point to a stabilising commercial real estate market, supported by easing financial conditions and improved liquidity. While uncertainty remains, there has been a clear shift in overall sentiment. For well-capitalised investors and developers, the next phase of the cycle presents some attractive opportunities.

With deep sector expertise, a strong balance sheet and the ability to structure and syndicate innovative loan solutions, Investec is well positioned to support clients as this recovery continues gains momentum.