After a prolonged period of volatility, the UK real estate market is showing signs of stabilisation. Investor sentiment is cautiously improving, buoyed by a more constructive financial environment, a clearer macroeconomic outlook, and growing confidence in the resilience of key sectors, in particularly prime offices.
Market sentiment turning a corner
While uncertainty remains, the mood among investors has shifted from defensive to selectively opportunistic. New commercial real estate lending rose 33% year-on-year to £22.3bn, and margins on prime office loans have tightened by 25–50 basis points – a signal that lenders are regaining confidence. Investment volumes are also rebounding, with £6.3bn transacted over the past 12 months, up 41% year-on-year, and foreign investors now accounting for 59% of activity.
Yields across UK real estate remain attractive relative to European peers, particularly in the office sector, where the value gap is drawing renewed interest. Inflation is easing and interest rate expectations stabilising, the UK is beginning to look like a value play for global capital.
Spotlight on offices: repricing, resilience, and repositioning
Within this broader narrative, the UK office market, especially in London, is emerging as a focal point for investors seeking both stability and upside.
Demand has rebounded, led by prime space
Occupier demand has strengthened significantly. Central London take-up reached 2.55 million sq ft in Q2 2025, 2% above the 10-year average, with 78% of 2024 movers expanding their footprint; a reverse of the pandemic contraction trend. Grade-A vacancy has fallen to close to 6%, and regional cities are also outperforming, with +40% of 2025 completions already pre-let.
Key sectors driving demand include:
- TMT (27% of UK take-up)
- Finance (30% of London take-up)
- Manufacturing & Energy (notably in the South East)
ESG, hybrid, and cost pressures
Despite the rebound, structural challenges remain:
- Hybrid working continues to cloud long-term space planning.
- ESG compliance is a looming cost: ~60% of UK office stock falls below EPC B, requiring significant retrofit investment by 2030.
- Financing costs remain elevated, with constrained LTVs and “higher-for-longer” rate expectations.
- Policy uncertainty, including tax reform and planning delays, adds further complexity.
Investment strategies: Selective and ESG-led
Capital is returning, but with discipline. Key trends include:
- International pension funds targeting long-term, ESG-compliant assets.
- REITs recycling capital into development pipelines.
- UK institutions stabilising, with core-plus strategies gaining traction.
- Private capital favouring assets with clear repositioning potential.
Core vs value-add
There are two paths to performance:
- Grade-A assets offer stability, with yields of 3.75–5% and strong tenant demand.
- Value-add strategies – particularly those involving EPC upgrades or conversions, offer higher return potential – albeit with greater execution risk.
Liquidity is improving, supporting future exits for repositioned assets.
Structural shifts
Repurposing and refurbishment:
- ~30% of 2025 deals involve repurposing (e.g. to labs, residential, PBSA).
- Refurbishment is back in focus, with short-income assets being upgraded.
- Foreign buyers dominate, accounting for almost three quarters of 2025 YTD investment.
- Pricing realism is attracting a broader buyer base, especially in Q4.
ESG as a value lever:
- Retrofit can boost rents by ~10% and total returns by +1%.
- Green financing is increasingly available for certified upgrades.
- Tenant experience – WELL-certified, amenity-rich, smart-enabled buildings is a key differentiator in retention and lease-up.
Looking ahead
The next UK Budget and broader policy direction will be pivotal. Potential tax changes (e.g. CGT, non-dom status), planning bottlenecks, and labour shortages could dampen momentum. However, if fiscal stability holds and green policy clarity improves, the stage is set for a more confident 2026.
The UK real estate market is not out of the woods, but it’s finding its footing. For investors with a long-term view and a clear ESG strategy, the current environment offers a rare window to access repriced assets, particularly in the office sector, before the next wave of capital fully returns.
