• The London tube journeys have recovered to 87% of pre-pandemic 2020 peaks³
• UK rents are expected to increase by 3-4% over 2025¹
• Vacancy rates remain at 23% in New York and 16% in Hong Kong²

Property markets stabilised throughout Q2 and Q3 of 2024 and some capital growth has been seen so far in Q1 of 2025, with discounts narrowing in the listed property sector as confidence returns. While we believe that 2024 may well mark the low within the sector generally for the next business cycle, we expect to see a slowdown in UK rental gains as vacancy rates climb higher on softer demand.

The lack of new property supply globally, especially within the industrial space due to lower historic investment, should help longer term rental growth and further support capital uplift in this sub-sector, albeit slowly.  It is the UK market that we expect to grow fastest over the next few years as the US has a weaker office outlook and higher yields over the next few years.

The end of 2024 saw the strongest quarter for office investment activity in the euro-zone within two years. Activity should continue to improve over 2025 as interest rates fall, but the rebound in transactions volume is still likely to be relatively modest given economic uncertainty.  We believe that the UK has some of the best outlook in this space with London data suggesting that the tube is seeing a recovery to nearly 87% of journeys compared to pre-pandemic 2020 peaks. This has meant that office rental prices in London have risen by around 10% (London City 11% and slightly more than the West End 9%).  New York, Berlin and Hong Kong have seen little growth, given vacancy rates remain around 23% in the New York and 16% in Hong Kong.

Commercial property investment by sector (£bn annual total)

Source: Capital economics

The property sector’s returns are dependent on overall economic growth and government debt yields.  As central banks cut interest rates, the comparably higher yields offered by property investments begin to look more attractive, especially in areas where vacancy rates remain low for the medium term either due to limited new supply or increased demand, like prime office space.  The expectations for interest rate cuts has been reduced recently and increased uncertainty around US tariffs affecting economic activity will mean that debt servicing costs remain high, limiting the speed of recovery, but discounts in the sector have already factored these risks in, so we expect limited downside from here.

Bowmore portfolios

We currently allocate to Picton Property Income, a UK REIT (real estate investment trust) that owns and manages commercial property within the industrial, office and retail spaces and is currently yielding 5.4%. The fund has returned 9.53% year to date.

Picton property is particularly well positioned to take advantage of online retail sales returning and eventually exceeding pre-pandemic levels, making their warehouse spaces more attractive to renters. We also expect shopping centres to become a more attractive part of the market due to lack of new supply and interest rate normalisation to further benefit capital uplift.

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.

Source: LSEG Datastream as at 20 March 2025

Sources:

¹ Zoopla, 2025

² Property Week, 2025

³ Transport for London, 2025