Early signs of recovery in UK Commercial Property, but headwinds persist
The latest Q1 2025 UK Commercial Property Monitor from the Royal Institution of Chartered Surveyors (RICS) offers a cautiously optimistic outlook for the commercial property sector. While sentiment remains measured, early signs of improvement are emerging across parts of the market. However, persistent domestic pressures and international uncertainties are creating a complex backdrop.
Simon Rubinsohn, Chief Economist at RICS, summarised the findings:
“Despite the turbulence engulfing the geo-political environment following President Trump’s tariff announcement at the start of April, feedback to the latest RICS was steady with the headline investment enquiries metric returning to positive territory, albeit modestly, for the first time since the second quarter of 2022.
Longer term indicators, while generally constructive, continue to reflect the likely headwinds facing the real estate market over the next twelve months. Aside from the challenges linked to the global economy, concerns around domestic issues including the impact of the uplift in NI contributions are seen as likely weighing on occupier demand.
Meanwhile the bifurcation in the office sector remains very visible in the latest results with the outlook for prime space seemingly improving as sentiment around secondary offices remains deeply negative.”
Key Takeaways
Occupier Demand:
Tenant demand across all property types remained broadly stable, recording a net balance of +1%. Modest gains were reported in the office (+6%) and industrial (+9%) sectors, while retail demand slipped slightly to -1%.
Impact of NI and US Tariffs:
Survey respondents flagged rising National Insurance (NI) contributions as a mounting pressure on occupiers, compounded by uncertainty arising from newly introduced US tariffs following President Trump's announcement.
Rental Projections:
Rental growth is forecast for prime industrial (+2.2%) and office spaces (+2.1%) over the coming year. Secondary office and retail markets, however, are expected to see declines of -2.6% and -3.2% respectively. Alternative sectors continue to attract optimism, with data centres (+4%), multifamily residential (+2.7%), life sciences (+2.4%), and aged care facilities (+2.2%) leading the way.
Investor Sentiment:
Investment enquiries turned positive for the first time since mid-2022, with a net balance of +4%. The industrial sector remains the standout, with investment demand climbing to +18%.
Capital Values:
Prime industrial and office assets are anticipated to appreciate by around 2% over the next 12 months. Conversely, secondary office and retail properties are expected to experience a decline of approximately 2.5%. Alternative asset classes are forecast to outperform, particularly data centres and multifamily residential developments.
Regional Performance:
Prime office spaces in Central London continue to lead rental growth projections, with an anticipated increase nearing 5%. Northern Ireland and Scotland are expected to deliver the strongest prime industrial rental growth, whereas retail rental optimism is mainly confined to Scotland and the North East of England.
Industry Voices
Several contributors to the RICS Monitor emphasised the challenges posed by external pressures.
Graham Chase of Chase Sinclair Clark highlighted concerns around the potential market impact of the US tariffs, particularly in London.
Meanwhile, Duncan Locke of McWhirter Locke Ltd commented:
“The overall effects of stubborn energy costs inflation, Rateable Value increases and National Insurance rises are affecting small businesses and their decision-making regarding property occupation.”