Investor Caution to Persist Until End of Year Despite Signs of Stabilisation

Posted by Colliers on 19th September 2025 -

Colliers’ Q3 2025 Real Estate Investment Forecast reveals a cautious but stabilising UK commercial property market, with investors adapting to a backdrop of persistent inflation, elevated borrowing costs and subdued consumer sentiment. Despite the Bank of England cutting rates by 125bps since August 2024, gilt yields remain high and debt costs have eased only gradually, limiting support for real estate activity.

 

Oliver Kolodseike, Director in the Research & Economics team at Colliers, comments: “While the macroeconomic environment remains challenging, we are seeing signs of resilience in parts of the market. Industrial and retail sectors continue to attract investor interest, and yields have begun to stabilise across several markets. However, the recovery in capital values is likely to be modest and uneven by historical norms.”

 

In Q2, UK commercial real estate investment volumes reached £12 billion, a 15% drop below the five-year quarterly average, but an improvement on Q1’s £10.3 billion. Industrial assets led the way, accounting for 24% of total investment, followed by offices (22%), retail (18%) and residential including PBSA (16%). Looking ahead, Colliers forecasts that all-property equivalent yields will fall slightly from 6.61% at the end of 2024 to 6.53% by year-end, reflecting general market stability.

 

"Uncertainty is high and investors are cautious, but selected sectors are still managing to find supporters," said Mark Girling, Executive Director in the Capital Markets team at Colliers.  

“UK real estate investors are finding opportunity in resilient sectors. Long gilt yields remain stubbornly high diverging from falling short-term rates and slowing repricing, while inflation, trade frictions and geopolitical tensions continue to cloud the outlook. In response, capital is flowing into inflation-linked long-income assets which have seen significant inward yield shift during the past 18 months.

“Outside this safe haven, fundamentals are driving value in selected sectors. Momentum is building in out-of-town retail, food stores, single-family housing, data centres, life sciences, and central London offices. Meanwhile, elevated asset valuations for industrial and logistics rely increasingly on strong rental growth assumptions, while prime shopping centres offer green stability.

“Despite a wall of available capital, vendors and investors alike await clearer pricing signals. Until then, investment volumes are expected to remain subdued and yields stable with marginal compression in some sectors.” 

The retail sector emerged as a relative bright spot in the second quarter of the year. Investment volumes rose to £2.2 billion in Q2, exceeding the five-year average by 8%. Cross-border investors were particularly active, accounting for nearly 60% of all retail transactions. Notable deals included GTAM Apex’s £114 million acquisition of Lakeside Retail Park in Thurrock and MDSR Investments’ purchase of Festival Place in Basingstoke for £99 million at a 10.5% yield.

Colliers forecasts that the focus on physical stores will cause rental growth at the all-sector level to accelerate from 2% in 2024 to 2.9% in 2025. Over the 2025-2029 forecast horizon Standard Retail – Central London (+4.1% per annum) and Retail Warehouses (3% per annum) will see the strongest growth.

Office investment volumes improved slightly to £2.7 billion in Q2, though they remain 25% below the five-year average. London’s West End recorded its third consecutive quarter of investment above £1 billion, supported by major deals such as Delancey’s £170 million purchase of 11–12 Hanover Square and the London School of Economics’ acquisition of Centrium, 61 Aldwych. Overseas capital accounted for 76% of purchases to date, with Norges Bank responsible for a third of this alone. 

Looking ahead to the rest of the year, investment volumes are likely to remain limited with liquidity returning when interest rates and debt costs fall further. Moreover, a slowdown in construction activity, signs of downward pressure on vacancy rates and sustained rental growth for prime assets should help shift sentiment towards the office market.

Colliers has revised down its total returns forecasts across the office sector for 2025 from 7.7% in our previous report to now 6.2%. Over the 2025-2029 forecast period, office total returns are forecast to average 6.5% per annum.

Industrial assets continue to perform strongly, with Q2 investment volumes climbing to £2.5 billion, driven by large portfolio transactions. Landmark deals included LondonMetric’s £699 million acquisition of Urban Logistics REIT and Logicor’s disposal of a 13-asset portfolio to Canmoor and Greykite for £240 million. Warehouse take-up over 100,000 sq ft totalled 7.7 million sq ft in Q2, up from 6.6 million sq ft in Q1. E-commerce and supermarket operators were particularly active, with JD.com, Tesco, Waitrose, and Marks & Spencer all committing to major lettings. 

As is the case with the other sectors, yield compression in the industrial sector will be limited as borrowing costs are expected to remain higher for longer. We believe that total returns across the industrial sector will slow from 8.3% in 2024 to 7.5% in 2025 before accelerating slightly in the following year. Over the 2025-2029 horizon, total returns will average 7.4%.

Other sectors saw mixed performance. PBSA investment rose to £470 million in Q2, with notable deals including Barings’ £101 million acquisition of the Spring Mews scheme in Vauxhall. Residential investment volumes fell to £560 million, well below the five-year average, while Hotel investment declined to £520 million from £580 million in Q1.