Savills raises outlook on total returns for UK real estate in ’25
Savills has raised its outlook for the average total return for UK real estate in its 2025 cross-sector outlook, forecasting an average return of 7.4%, compared to 6.8% for 2024.
In its annual cross-sector forecasts, Savills said that while income will continue to make up the bulk of property performance, from 2025 onwards a burgeoning recovery in capital value growth in most sectors will help boost investor returns.
“Overall 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,” said James Gulliford, joint head of UK investments, Savills.
Residential buy-to-let in the North West remains Savills’ top performer for annualised returns, as it did in its 2024 forecasts, but central London and regional offices have moved up the table as the firm says that positivity in the sector is being driven by the restrained supply of prime space in most cities and the expectation of yield hardening.
In total, 12 UK property sub-sectors are forecast to see annualised returns of over 8% between 2025-2029, an increase from eight sectors for the years 2024-2028.
Savills said that while expectations of further interest rate cuts should herald the beginning of a return to more normal levels of transactional activity in many markets, the policy announcements in the Budget will have asymmetric effects in 2025. It says that retail, leisure and agricultural businesses are likely to feel the biggest impacts and, in the residential sector, the treatment of ‘non-doms’ will affect the prime central London residential market.
“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,” said Gulliford. “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.”
In commercial property, Savills says that a growing economy should result in business expansion, leading to rising demand for shops, offices, factories and warehouses, although the impact of National Insurance changes on companies’ bottom lines will be felt in the leasing markets. It has therefore revised its take-up forecasts downwards slightly to reflect a more cautious corporate environment in 2025.
However, 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.
Savills says that it predicts that 2025 will also see more institutional interest in retail than over the previous decade, motivated both by the cycle and consumer confidence. Prime shopping centres, retail warehouse parks, and substantial high street parades are all expected to be popular buys next year.