Navigating Real Estate for the year ahead: the opportunities and challenges

The early months of the new government brought mixed news for the real estate sector. The sector has been highlighted as a keystone for growth with the National Planning Policy Framework (“NPPF”) and the Invest 2035 Green Paper which intends to unlock sustainable real estate growth. However, reaction to the Autumn Budget appears to have impaired the “feel-good factor”.

In 2025, we anticipate inflation continue to gradually decline, accompanied by a steady easing of interest rates. This positive trend will lead to lower borrowing costs, freeing up cash and fostering a renewed sense of confidence and optimism.

While this stable outlook for the sector is a marked improvement compared to 12 months ago, it remains cautiously optimistic. Concerns about UK Government borrowing in early January, the subsequent weakening of sterling, and the threat of tariffs from the new Trump administration pose challenges to this cautious confidence.

Residential housing

As part of Rachel Reeves’ “Get Britain Building” campaign, there is a renewed focus on stimulating economic growth and addressing housing shortages through planning reforms and infrastructure projects.

However, the residential housing market in 2025 continues to face a myriad of challenges, key to demand being the trajectory of the economy. There is growing demand for developers to deliver a multi-use sustainable offering, which with increasing use of digital technologies and AI, is driving innovation. Headwinds to supply remain though as the NPPF is rolled out, with regulatory change and skills shortages challenging developers.

In the South and Southeast region in particular, challenges to developers are from increased ESG requirements, in particular water neutrality. These challenges are likely to continue throughout 2025.

Indicators from the build-to-rent sector show growth that is expected to continue.

Commercial Real Estate

The sector suffered a downturn in 2024 but is anticipated by many in the market to rebound significantly in 2025.  The result of an increasing shift away from homeworking by employees.

The commercial sector is seeing higher rental returns on the top-quality assets in the right locations. With minimum Energy Performance Certificate (EPC) ratings rising to C in 2028, for some the race is on to re-define their portfolio to meet demand. The continued impact of flexible office space providers is driving property owners to innovate, contributing to the strong competition among landlords and creating opportunities for occupiers to negotiate favourable deals.

5 years on from covid lease negotiations, we are seeing break clauses and rent reviews falling due in 2025 and the expected hikes in rental rates may lead to increased relocation activity.

For in depth predictions for workplace and office spaces in 2025, view our guest article from commercial real estate agents Devono. 

Construction

We have seen several businesses in the sector report a downturn in results during 2024. Pipeline projects slowed during 2023, following the economic shock, however, we are pleased to see the pipeline into 2025 shows an upturn, but with work to do to make up the lost ground.

Infrastructure and regeneration projects appear to be driving growth, with demand for commercial property to meet increasingly high ESG and sustainability standards.

Conclusion

In summary, the UK real estate market enters 2025 with scope for growth, buoyed by the Government’s headline policies. However, headwinds exist on the pace of delivery of these policies with the backdrop of continued economic uncertainties.

As we navigate through 2025, the real estate sector stands at a crossroads, with opportunities for growth tempered by the need for resilience and adaptability in the face of ongoing economic challenges.

For more insights and tailored advice, contact our real estate team. We’re here to help you seize the opportunities and navigate the challenges the year ahead.