The market is currently flatlining, but there’s an expectation of a better final quarter for this year
Taxing times?
The market remains in a period of stasis, with the average prime yield remaining at 5.9% for six consecutive months. Two-thirds of the way through the year, we have seen only four sub-sector yields fall, which mostly occurred in Q1. Ongoing global events and now the anticipation of the UK Budget in late November may not catalyse a rush of investment activity, but we are still expecting a better final quarter for this year. There are mixed messages to investors with UK Government bond yields at a quarter-century high, the safe haven of gold at a high, coupled with the equity markets reaching new heights. A weakening sterling adds to the attraction of UK commercial real estate to overseas investors as well.
There are indicators of improved activity during this ‘back to school’ period, as anecdotally, investors have seemingly refreshed their outlook, as we have seen an increased level of requests for commercial property market data. This is particularly noticeable from the private equity investors.
The Budget is always a reason to delay investment decisions, at least until the Chancellor’s intentions become clear. More so, this year will be no exception, and this event, being over two months away, may throw more caution towards the market in the short term. Tax rises are expected, but with all the various ‘ideas’ in circulation over the summer, looking for business and consumer reaction, it remains unclear where the taxation hammer will strike. Therefore, for now, the positive sentiment remains muted for some investors.
Some key office markets showing buoyant take-up levels
Sentiment towards the UK office market for investors remains mixed, but there are more positive signals for them to consider. The UK performance data, in terms of capital value growth movements, shows that we are likely passing the trough for the current cycle.
Despite the most recent UK employment figures contributing to the more negative sentiment, the UK PMI indicators presented faster growth in business activity in August. A medium-term driver of the office markets comes from the planned positivity of the Industrial Strategy, which will take some time to feed through. The Chancellor outlined in early September that the UK has huge potential, outlining our “world-leading brands, dynamic industries, brilliant universities, and a skilled workforce. We are a global hub for trade”.
So, over the second half of 2025, regional office requirements are expected to remain robust, particularly in the larger size bands. Requirements for spaces over 20,000 sq ft now account for 44% of total demand, highlighting the continued importance of large-scale occupiers in shaping market activity. The result of more positivity from office occupiers, the take-up data for H1 2025 for the key UK markets (shown in the chart below) may be a surprise to some observers.
The first half of this year has seen higher occupier demand than may have been expected. The general sentiment is proving to be too negative as occupiers are still doing deals. Coupled with rising demand levels, some markets will be supply-constrained and hence the rising in rental growth for some cities. This imbalance between demand and supply is continuing to drive rental growth, a trend expected to persist through the remainder of 2025 and into 2026. Occupiers with current requirements will be competing for best-in-class space. Offices that offer this are well-positioned to experience much stronger rental growth. Decisive investors can capitalise on this market dynamic at current pricing levels and potentially realise enhanced returns.
A question following the previous section is how well office requirements will hold up during the next few quarters.
For the best real estate insights and analysis, there is a need to look at all available data sources. Supportive rather than definitive, the Google Trends search data is interesting to review to highlight potential indications of future activity.
The score represents the relative level of search activity compared to the peak in the period analysed (peak score equals 100). The chart only shows data from the start of 2019 to the present, but the scores are for a ten-year period. It is no surprise that ‘working from home’ peaked during the early stages of the pandemic. More interestingly, the most recent global search activity is currently only a fifth of the peak. However, aligned to this, the ‘office space to lease’ search is well above trend and peaked in February this year, compared to the ten-year period analysed, which may be positive for future office demand.
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