Unveiling its 2025 cross-sector UK forecasts, Savills strikes an optimistic note and predicts highest returns for North West buy-to-let at a total return of 10.8 percent.
The international property agents and consultants, Savills has raised its outlook for the average total return for UK real estate in 2025. The agency’s cross-sector outlook is forecasting an average return of 7.4%, that’s compared to 6.8% for 2024.
Commercial property was hit hard over the Covid period. But Rightmove, with its copious amounts of data, has also identified something of a turnaround.
It’s well known that the commercial property market suffered steep declines in buyer activity since Covid. In fact, according to property agents CBRE, during 2023, compared to 2022, retail transaction volumes were down by around 30%, while office and industrial investment both were down around 50%.
Even more concerning for commercial property landlords was the fall in capital values in 2023. Month-on-month declines throughout the second half of 2023 brought a cumulative decline in headline values since mid-2022 to 22%. This followed a similar decline of around 21% in 2022, says CBRE.
With Savills annual cross-sector forecasts, the international real estate advisor found that while income will continue to make up the bulk of property performance, from 2025 onwards, a recovery in capital value growth in most sectors is on the cards, which will help boost investor returns.
Savills research shows that residential buy-to-let in the Northwest of England remains its top performer for annualised returns, as it did in its 2024 forecasts. Now, central London and regional offices have moved up Savill’s table as it finds positivity in the sector being driven by the restrained supply of prime space in most cities, and the expectation of yield hardening - Yield softening refers to an increase in yield, while yield hardening refers to a decrease in yield and therefore an increase in price.
Savill’s research points to 12 property sub-sectors in the UK where it can confidently forecast annualised returns of over 8% between 2025-2029, that is an increase from its previous eight sectors for the years 2024-2028.
Savills says that while there are still expectations of further interest rate cuts, which should see a return to more normal levels of transactional activity in many UK property markets, the policy announcements in the Budget will have some negative effects in 2025.
The agency says that retail, leisure and agricultural businesses are likely to feel the biggest impacts of the budget announcements, while for the residential sector, the treatment of ‘non-doms’ will have a big impact on the prime central London residential market.
James Gulliford, Savills Joint Head of UK investment, says:
“The 40-year high of inflation has passed, and most forecasters are predicting around 100 basis points of base rate cuts from now until the end of 2025. Both of these are good news for land and property occupiers and landlords and should bring increased levels of transactional activity in many markets. However, the new Government stuck its policy flag in the ground with the Budget, and while higher taxes to support public spending were never going to be a surprise, the details of this have been enough to cool some of our forward views a little. Overall, however, our outlook for 2025 and beyond is more positive than it was 12 months ago with more income and capital value growth on offer in most sectors.”
Savills thinks the foundations of a commercial real estate recovery are in place. It sees despite some headwinds, the economy growing, which should result in business expansion, leading to rising demand for shops, offices, factories and warehouses.
However, the impact of National Insurance changes on companies’ bottom lines will be felt in the leasing markets. Savills has therefore revised its take-up forecasts downwards slightly to reflect a more cautious corporate environment in 2025.
It says that with the undersupply of prime space in core locations, it does not expect to see development viability improving dramatically in 2025, therefore prime rental growth levels are likely to be sustained at their recent high levels and continue to drive total returns over the next five years.
This lack of development activity will also contribute to prime office yields finally hardening in 2025. Savills thinks that some investors will remain cautious, either because of legacy issues or concerns about the impact of agile working, but the lure of rental growth and a period of rising prices and reduced volatility in the commercial property market caused by factors such as improving investor sentiment, falling debt costs, and rising CFO confidence will be too much to ignore for others.
Savills predicts more institutional interest in retail in 2025 than was the case over the previous decade. This will be motivated both by the business cycle and consumer confidence. Prime shopping centres, retail warehouse parks, and substantial high street parades are all expected to be popular buys next year turning around a decade of decline.
There remain areas of undersupply across the country particularly in the larger size ranges which may be suitable for speculative development. There are undersupplied or late-developing logistics markets for example.
“For standing assets, we expect stronger rental growth in markets which continue to have limited supply and pipeline in certain size bands,” says Savills
In the case of good offices in core locations, Savills says there’s no substitute for a great office location, and “the undersupply in these locations will potentially mean A+ rental growth on B+ assets. These will be quicker and less costly to deliver into a period of undersupply.”
Prime retail streets and schemes will return real income growth and “the high income returns that retail offers will combine to make retail property an alluring prospect for investors who are comfortable with asset management.”
In the case of residential property, Savills thinks the housing market is in the early stages of recovery, but a variety of new policies to sustain it in 2025 remains uncertain. The agency says the recovery in residential markets began in 2024, but that “sustaining it depends heavily on continued cuts in interest rates to bring more buyers (particularly second and third-time home buyers) back to the market.”
With inflation back to hovering around the Bank of England’s target of 2%, but rising slightly, how quickly and how far the bank base rate can be reduced will determine the ability and appetite of lenders to loosen their purse strings, says Savills.
But fundamentally Savills expects to see the full range of buyers and their purchasing power gradually increase over the next five years, with the provisos that stamp duty surcharges and regulatory reform are likely to constrain activity among private buyers to let investors. Consequently, Savills predicts overall house price growth of between 20% to 25% over that period, with 4% predicted for 2024.
Family homes in “educational super towns” thinks Savills, given an “expected drive to find good, affordable education at a time when VAT on school fees is likely to shape where more affluent families put down their roots, Savills expects to see strong demand for family homes near outstanding state schools.”
Despite more regulation and taxation for public landlords, the multifamily in core cities sector will continue to attract significant interest from institutional investors, thinks Savills. “With debt costs coming down, a significant pipeline of consents and renewed government support through the PRS debt guarantee scheme, multifamily is likely to make a resurgence.”
Institutional investors will be looking at 100 to 250 unit development sites in those areas set for the Government’s higher housing targets. These will likely be the sweet spots, thinks Savills for those developers “seeking to rebuild their pipelines as the market improves. From 2025 there will be a window of opportunity to bring forward land for residential developments of this scale in the 55% of local authorities that will face higher housing targets but don’t have an up-to-date Local Plan.”
Rural property has been battered and bruised by the budget, but land and land management, says Savills, “will remain key to the Government targets on food production, environmental recovery, development, and economic growth, supporting investment.”
Savills says that, “despite the impact of the Budget and poor weather conditions this year, land as an asset class remains a good investment opportunity, given its role in helping the Government meet its various manifesto commitments, plus offers a reliable hedge against inflation. It also remains a more favourable asset class for tax treatment compared to some other sectors, as selling farmland and generating cash will have worse inheritance tax (IHT) treatment under both current and post 6 April 2026 IHT rules.”
Savills continues:
“…the assumption is that the benefit of investing in land due to the tax reliefs has recently diminished, ultimately, it will take a material change in supply and demand dynamics to significantly impact pricing, and this may take some time to materialise.
“Given the diverse range of demands on land, it anticipates continuing to see a variety of purchaser types in the land market, some with reasons for investing beyond just tax benefits. Additionally, regional variations in supply and demand will continue to affect pricing.
“Savills forecasts that farmland values are likely to remain stable over the next five years as businesses plan and adapt, the Government shows leadership in its direction of travel, and confidence and stability increases in the rural sector.”
Prime arable land with a resilient water supply, Savills thinks will continue to be an important food production output from land and, as climate change challenges continue, “the focus is on land with a secure, sustainable and resilient water supply.”
There is also land with environmental opportunities. Environmental protection and recovery is at the heart of UK Government commitments and targets. These are specifically those stated in the Environment Act 2021. Environmental Land Management schemes provide financial incentivisation for land managers in England, and more opportunities will be unlocked from the private markets, thinks Savills.
Savills will publish a full 2025 cross-sector outlook report available from 7 January 2025. Webinar link: https://savills.zoom.us/webinar/register/4017321872624/WN_tNCNbictQQ2I1BTIfmIi8Q#/registration
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