Real Estate Investment Market Update: Q1 2025

Current market noise and mixed data results have made the real estate investment market increasingly difficult to decipher.

On a macro scale, the gradual cutting cycle of the Bank of England base rate could signify a return to normality. In the near term, rate cuts have stalled, held at 4.5% (20 March 2025) with a shift in narrative to one of uncertainty fuelled by trade tariffs and fiscal policy.

The recent Spring Statement emphasised these issues, with the OBR’s revised expectations on GDP now halved and projected inflation to exceed the most recent 2.8% CPI reading (February 2025).

Despite the negative forecast, investors are likely to welcome the restoration of the Government’s fiscal headroom and lower than expected gilt issuance, creating stability in the bond market.

James Little, a Senior Surveyor in our Thames Valley valuation team, looks back at the real estate investment landscape of the last five years and explores the potential direction of travel as we head towards Q2 of 2025.

Real estate investment market shock

The past five years have been transformative for investors. The low cost of capital environment created by the pandemic, led to record levels of financing activity. The government led the way with a peacetime record of 14.5% of GDP raised.

The subsequent deluge of borrowing and geopolitical shocks formed the catalyst for a historic period of inflation where CPI was recorded at 11.1% in October 2022, following the Truss mini-Budget and subsequent liability-driven investment (LDI) sell-off.

In response, base rates expanded to levels not witnessed since pre-2008, with an upward shift of 325 basis points from September 2022 until the peak of July 2023. With such a rapid change to the base rate, the characteristically illiquid real estate market has been catching up.

The sentiment for real estate investment values has been negative over the past few years, as vendors entered a period of price discovery, looking to incentivise the sale of their assets in response to higher borrowing rates.

This was reflected in portfolio values, with institutional investors such as Bruntwood noting a 17% depreciation in its portfolio valuation in 2023.

This aligned with research conducted by Goldman Sachs who, in 2022, estimated a 15-20% fall in values between June 2022 and December 2024.

As with any shift in the market, there were winners and losers depending on the investment sector.

For many, this was a readjustment reflective of a post-pandemic world. The industrial and logistic sectors remained resilient, meanwhile offices had seen an outward shift in yield profiles, adjusting for flexible working and ever-changing occupier requirements, as companies navigate their employees return to office.

Positive outlook remains but not without potential volatility

At the start of 2025, investment sentiment was positive. Prime real estate yield guides noted an element of stability in yield profiles following a period of expansion and price discovery.

The gradual fall of the base rate gave people hope for more preferential borrowing rates in 2025 and beyond. Many now see this as the bottom of the market with 2-3 base rate cuts anticipated in the current cycle.

Despite the positive outlook, recent key indicators such as UK gilts and inflation data provide a reminder that volatility persists.

One thing that market analysts do agree on, is the shift in the economic environment and the cost of debt which is unlikely to return to the historic levels seen post financial crash.

This leaves a market with opportunities for investors who can utilise capital to acquire low leverage positions or refinance and reposition into more emerging sectors.

One recent example is Landsec’s pivot to residential. The investor recently announced the next phase in the company’s strategy would see a move towards “higher income, higher income growth and lower cyclicality.” This trend was also identified in our January Residential Investment Market update.

Another shift noted in the higher liquidity and globally exposed market of London, are the green shoots of the office sector which are starting to emerge. Institutional investors are now starting to acquire trophy assets, such as 2 Finsbury Avenue, Broadgate and the Norges-Grosvenor transaction in the West End. Due to their low leverage and high capital positions, investors have been able to benefit from depreciating values.

Looking ahead to 2025 and beyond, investors and market commentators are hopeful for an uptick in transactional volumes compared to the previous year as market participants adapt to the new norm, repositioning their portfolio exposure and seeking new opportunities.

Vendors are sensing the potential for a more liquid market, with realisation likely tied to the current pace of interest rate cuts. For those looking to hold their portfolio position, deploying capital through value-add opportunities could be the most viable option in the near term.

As ever, we continue to monitor the market and the potential impact that everything from the Trump presidency to the downward pressure from changes in National Insurance Contributions, could have on the real estate investment landscape.

For more information about the real estate investment market, get in touch.