CBRE's mid-year health check: How is your sector doing?

With more than half of the year gone, the world's largest real estate adviser has checked in on its forecasts for UK real estate performance from the beginning of the year and reviewed how regulation around planning, sustainability, climate change and rent reviews is affecting the market.

CBRE says it is clear that real estate investment in the UK is yet to see a full recovery with fluctuating transactional activity in the first half a reflection of economic uncertainty. It says the office sector, however, saw a rebound in investment.

In terms of capital markets, at the beginning of the year CBRE was forecasting total returns to improve in 2025 thanks to income return being supported by returning capital growth. CBRE said at the time increases in rental values would be the main driver for capital value growth, but there was the chance of some yield compression, especially in sub-sectors where investor demand is stronger.

Fast forward to now and CBRE says a strong fourth quarter in 2024 that led to a 7.7% total return for UK real estate had set a challenging target to beat. According to its index, all property total returns to June were 4.2%, putting the UK market on track to record 8%-plus total returns this year. It says income returns continue to be the main driver of total returns, but performance across the retail, office and industrial sectors has been boosted by capital growth. Capital values at an all property level have risen 1.4% in the first half, driven by rental values rising 1.6% in this period. In contrast, property yields have been largely unchanged.

It warns that, with little scope for compression if long-term bond yields stay at their current levels, the government proposals to amend leasing practices and ban upward-only rent reviews might weigh on pricing.

For investment, at the start of the year, CBRE was predicting a gradual increase over 2025 as the market continued to "normalise".  In fact real estate investment volumes in first half 2025 fell when compared with H1 last year, thanks to uncertainty around economic prospects, which also impacted UK bond yields. CBRE says more deals are now coming to fruition, and so it expects higher investment volumes in the second half of 2025. It continues to see mergers and acquisitions in the UK listed real estate sector thanks to continued large discounts to net asset value in stock market pricing for some firms.
 
Lending-wise, CBRE had expected transactions to increase as leverage became more attractive. It expected real estate lending to increase in 2025 and demand for loans to be split more evenly between finance for new acquisitions and refinance of existing loans. This would be facilitated by falls in debt costs.

CBRE says by the mid-year point lenders have maintained their appetite to deploy capital into real estate, despite economic headwinds. Seventy-eight percent of lenders expect to increase originations in 2025, according to its European Lender Intentions Survey published in June.

Refinancing will remain the main source of demand for loans, CBRE says, as the transactional market continues to recover. It says that while lenders still prefer the living and logistics sectors, sentiment towards prime assets across most sectors has improved relative to 2024.

In terms of pricing, CBRE says debt costs for new loans have fallen year-on-year, but only moderately as there has been no sustained downward movement in key benchmark rates such as the UK five-year swap rate. The principal driver of lower debt costs has been a reduction in lender margins as the debt market becomes increasingly liquid and competitive, it adds.

CBRE has then reviewed its predictions for each sector.

CBRE had been predicting industrial investment volumes would rise in 2025, building on an already healthy market for smaller assets and increased demand for larger lot sizes.

In fact investment volumes in the first half 2025 totalled £2.5 billion, which was slightly lower than H1 2024 (£2.7 billion), with conditions remaining challenging for investors due to geopolitical uncertainty. Portfolio sales accounted for 46% of volumes in the first half, accompanied by some large individual asset sales. It says investment volumes are likely to grow in H2, as industrial and logistics was the preferred sector for investors targeting the UK in 2025, according to its European Investor Intentions Survey. But higher long-term interest rates for longer means yields are expected to remain stable in 2025, with yield compression to be pushed into next year.

Occupier-wise, CBRE had expected the market to be broadly consistent with last year, with the vacancy rate to continue to stabilise throughout the year. CBRE says it still anticipates take-up will remain steady throughout the year and the second half, with 9.9 million square feet of space under offer in the UK. The UK vacancy rate increased in the first half of the year, due to rising secondhand availability and speculative developments completing. Speculative space under construction is expected to fall in H2, due to a high level of completions. As a result, CBRE says the vacancy rate will increase throughout the remainder of the year, as this new space becomes ready to occupy.

CBRE predicted that the return of larger lot-size deals in the second half of 2024 would continue in 2025. It also expected to see a mix of European funds, domestic funds and well-capitalised global family offices to form the buyer pool in 2025 because of an "increase in liquidity and greater price discovery expected through the year".

By the mid-year point, in central London, 11 deals over £100 million had transacted in the first half of the year, exactly the same number as full-year 2024. London's City submarket in particular has seen significantly more investment activity for larger lot sizes with six transactions larger than £100 million this year, compared with zero in 2024. CBRE has also seen the return of overseas buyers to the UK office market, accounting for 59% of year-to-date investment volumes as compared with only 36% in 2024. It now expects investment volumes in 2025 to be stronger than the previous two years but still below the trend level.

Occupier-wise, CBRE expected the limited supply for Grade A offices driven by a constrained pipeline and high demand from occupiers to put pressure on prime rents in 2025. It was forecasting prime rental growth in all markets, with London's City sub-market seeing the largest increase in 2025.

CBRE says prime rents increased in the first half of 2025 across central London, with all the five main submarkets seeing an upward movement in rents. Some markets across the South East and regional cities also saw rental growth during the first half. The pipeline remains constrained with a lack of availability of high quality stock. CBRE continues to forecast rental values will increase across all the UK markets it tracks in 2025. The highest growth for central London is expected in the West End, followed by the City, with Birmingham and Glasgow expected to take the lead in the regional markets.

In terms of the flex market, office take-up by flex operators has been more subdued in the first quarter of 2025 than CBRE had expected.

In retail, CBRE was predicting prime space to becoming increasingly scarce. Retail parks continued to exhibit the lowest vacancy rate, consistently declining since 2021.

By the mid-year point, retail parks continued to have the lowest vacancy rate (declining from 6.1% in the first quarter to 6% in the second quarter), as new developments remain at very low levels. On the high street, vacancy rates have continued to tighten while in shopping centres, strong leasing and low occupier failures drove a fall in vacancy levels in the best locations – decreasing from 17.2% in Q4 2024 to 16.8% in Q1 2025.

Continued low vacancy has created competitive tension with retailers, who are bidding more aggressively to secure sites. Investment in retail remained "robust" totalling £3.6 billion in the first half of 2025. CBRE says retail parks continued to deliver the strongest activity, a trend it believes will continue in the coming months.

CBRE's reflections on the changing nature of sustainability regulations and the climate change risks provide a number of important updates.

At the beginning of the year, it predicted the incoming Labour government would announce a raft of sustainability policies including regulations specifically affecting real estate. These regulations would focus on improving the energy efficiency of existing buildings as well as new developments.

At the mid-year point it says the industry has had confirmation of the intention to raise the Minimum Energy Efficiency Standard for private rented accommodation to C by 2030. It also predicts the commercial MEES uplift will be announced later this year. It expects the minimum EPC to be set at B, with a deadline at least one year after 2030 but not later than 2035. The Future Homes Standard will lay out new building regulations for residential properties when published in the autumn. Mandatory solar panels have been confirmed as a requirement.

In terms of sustainability disclosure it predicted there will be confirmation of how the International Sustainability Standards Board’s International Financial Reporting Standards will be adopted as part of the UK's Sustainability Reporting Standards.

The government has confirmed that IFRS disclosures will form the basis of UK SRS. CBRE expects a decision towards the end of the year on which entities will have to report on SRS S1, covering sustainability-related financial risks and opportunities. CBRE says this goes beyond climate-related issues, also covering regulatory risk and governance risks related to executive oversight of sustainability decisions. There will also be an update on SRS S2 covering climate-related physical and transition risks and opportunities. This includes information like greenhouse gas emissions, exposure to physical risks like flooding or wildfires and details of climate transition plans. The government is consulting on requiring the development of climate transition plans.

At the beginning of the year, CBRE predicted climate risk to real estate would be reflected in lending, valuations and transactions. Sustainability objectives, it said, will become increasingly important to securing debt. Physical risk exposure and insurance premiums could undermine some transactions, it added, while valuations will continue to reflect the costs of regulatory compliance and adaptation to physical risks.

Fast forward, and 71% of respondents to its 2025 European Lender Intentions Survey said they would not lend where assets either do not meet their sustainability criteria or lack a business plan to improve sustainability. Its Sustainability Index continues to show underperformance in valuations for assets deemed energy inefficient based on their EPC rating. CBRE expects this underperformance could become more pronounced later in 2025 when changes to the commercial MEES are confirmed. Its valuers are already aware of instances in 2025 where transactions have fallen through because of the difficulty in insuring assets against physical climate risks, the adviser says.

CBRE reports that its forecast that data centres would set a new record for take-up are coming true, particularly as sites outside of the M25 are increasingly in demand.

In operational real estate, the hotel sector is now expected to see marginal revenue per available room growth across the UK, still driven by an occupancy-led strategy, rather than average daily rate, due to the "headwinds brought on by geopolitical and economic uncertainty". The challenge for operators is maintaining the growth in revenue, offsetting increasing operating expenses to maintain profit margins, CBRE writes. Experiential leisure demand remains high but the impact of the employer National Insurance and the National Living Wage rises has hit prices and demand in other subsectors, CBRE says. Premium ends of the health and fitness market have continued to perform strongly.

Investment activity started more slowly than expected for the healthcare sector in 2025, as transactions have been taking longer. Investment activity in the self-storage sector in the first half 2025 has been more cautious than expected, largely in response to broader economic uncertainty.

More broadly, CBRE says signs of recovery in UK real estate are evident through continued capital growth, the progression of major transactions, and improved sentiment towards lending, particularly on prime assets. It expects an increase in investment volumes in the second half, including a recovery in investment for larger lot sizes, as well as continued M&A activity in the listed sector. Nevertheless, the potential impact on investment from recently announced proposals to reform rent reviews "needs further consideration".

In the living sector, the government’s pledges to boost supply are now translating into action, showing that they are committed to fixing the country’s housing crisis. CBRE says this will be hugely positive for the living sectors, with investment across sectors including build-to-rent, student accommodation and affordable housing expected to be strong.

Alternative asset types will continue to play a crucial role as demands for healthcare, digital technologies and a sustainable future increase. While demand is growing, supply is still insufficient in some sectors, CBRE argues, saying this means it is essential new development is stimulated and infrastructure improved.