In recent years, UK property investors have faced a challenging landscape, with many turning away from commercial real estate. However, 2025 appears to mark a turning point, as falling interest rates and rising demand signal the potential revival of the sector. Here's what you need to know if about commercial property to your investment portfolio.
Commercial property covers a broad range of assets, from offices and shops to hotels and warehouses. These assets are increasingly seen as a way to diversify investment portfolios, offering potential returns through rental income or capital appreciation.
Compared to other asset classes like equities or bonds, property tends to show low correlation, meaning its value moves independently and is less affected by stock market fluctuations. As interest rates decline and office spaces are back in demand, many investors are considering whether commercial property could once again be a lucrative avenue.
The revival of commercial property
Recent trends show commercial property gaining momentum, with demand rising in response to falling interest rates. Global real estate services provider Savills has predicted that after years of stagnation, the commercial property market is poised for a strong recovery in 2025. "We expect re-financing driven activity, the sustainability agenda, and the trend towards corporates requiring greater office attendance for staff to continue to be positive for transaction volumes," the firm said.
Large companies such as JP Morgan (JPM), Lloyds Banking Group (LLOY.L), and Meta (META) are also contributing to the resurgence, as they encourage or mandate more frequent office attendance, suggesting a potential shift in office space demand.
“The outlook for 2025 is fairly positive, with more stability and improvements in wider macro-economic factors,” Christian Smith, director at Savills, said.
“Beneath the headline figures for industrial, the warehouses and logistics sector continues to be the strongest performer compared to the office and retail sectors and we’re also seeing surprising resilience in the manufacturing market. The shift from traditional retail to online is continuing to grow, driving ongoing demand for warehouse space.
“Businesses are increasingly looking for more comfortable spaces for their employees, leading to many companies upgrading to more modern commercial units. We’re also seeing energy efficiency trends play out, with many companies also looking for more up-to-date space which is more insulated and efficient,” he added.
Data from property site Rightmove (RMV.L) supports this trend, showing a sharp increase in investment demand across all commercial property types, with the industrial sector leading the charge. Demand for industrial listings surged 72% from the previous year, while the office sector saw a 57% jump.
This uptick comes amid a raft of interest rate cuts by the Bank of England, including reductions from 5.25% to 5% in August 2024, followed by further decreases to 4.75% in late 2024 and the first rate cut of 2025 to 4.5%.
“Lowering interest rates have further fuelled the attractiveness to invest in commercial property after a couple of tough years for the sector. The industrial sector continues to lead the way, with the growth in e-commerce and online shopping turbocharging demand to both invest in and lease industrial space,” Andy Miles, Rightmove’s managing director of commercial real estate, said.
Mat Oakley, director of commercial research at Savills, believes investors should look at office space.
He said: ”Prime shopping centres, retail warehouse parks, and substantial high street parades should all be buys in 2025, with investors motivated both by where we are in the cycle in terms of receiving both real income and capital value growth, and more confidence in the sector as a whole as increased consumer confidence feeds through to retail spend.
“But offices are my big call: with yields not hardening in 2024, 2025 is likely to be their year, and, unlike previously, the positive story won’t just be limited to super prime spaces. Most major UK office markets have no new buildings coming on stream in the next three years, so if business demand continues on its path and the economy improves, office rental growth will be strong across almost the whole quality spectrum, so long as the location is good. Some investors will be hesitant to dip their toes back in, but the returns will be compelling enough to convince others.”
Investment and commercial real estate company Colliers predicts the UK economy will stabilise in 2025, with interest rates expected to fall to 3.75% by the end of the year.
Colliers said investors are moving beyond traditional prime assets to focus on value-add opportunities, sustainability, and flexible space. “As a result, UK commercial property returns are expected to reach double digits (11%) this year, supported by this changing mindset,” according to its 2025 commercial property predictions report.
A focus on the industrial sector
The industrial sector is seeing particularly strong performance, driven by the continued rise of e-commerce and online shopping.
Ian Humphreys, founder & CEO of Brickflow, a digital marketplace for property finance, said: "We’re still near the beginning of a global rate-cutting cycle, which is bringing more and more investors back to the commercial property market."
He added that while the office market is still in transition, the industrial sector remains attractive due to businesses' ongoing need for larger, modern warehouse space. Furthermore, the shortage of high-quality, energy-efficient commercial properties is creating opportunities for investors looking to add value.
How to invest in commercial property
There are several ways to invest in commercial property, depending on your budget, preferences, and risk tolerance.
Direct investment
This involves purchasing a property outright, or a share in a property. While potentially lucrative, it often requires substantial capital and is not practical for smaller investors.
Commercial property funds
For many, investing through commercial property funds provides an easier and more affordable route. These funds either directly own properties or buy shares in property-related companies, with returns coming from either rental income or the growth in the value of shares.
Bricks-and-mortar funds: These funds directly buy commercial properties, spreading risk across multiple assets. Returns are generated from rental income and property value appreciation. Though they offer exposure to the commercial real estate market without the large capital outlay, they also carry the risk of value fluctuations.
Indirect property funds: Funds like unit trusts and Oeics (open-ended investment company) buy shares in companies that invest in property, offering more liquidity than direct property funds. While these funds are more easily tradable, they also bring the volatility associated with stock markets.
Real estate investment trusts (REITs): These are companies that own, operate or finance income-producing real estate. REITs are ideal for investors seeking liquidity, diversification and regular income without the hassles of property management. A popular choice for those seeking exposure to property without the tax burdens of other property-related companies. REITs must distribute at least 90% of their profits as dividends, which may lead to higher payouts for investors. However, REITs are subject to capital gains tax, making them less tax-efficient for higher-rate taxpayers.
Property investment trusts: These operate similarly to REITs but can use "gearing" — borrowing money to increase investment capacity. While this can enhance returns in a booming market, it can also amplify losses if conditions deteriorate.
Private equity real estate funds: These funds pool capital from multiple investors to invest in real estate projects and frequently focus on value-add or opportunistic investments. These funds are best for accredited investors seeking high returns and willing to commit capital for extended periods.
Be aware that open-ended funds, typically seen as a flexible option for investors, come with a cautionary note — they can be "gated" or even suspended if a rush of withdrawals overwhelms the fund. While such closures are generally intended to be temporary, they can last for extended periods — months, or even years — leaving investors with their capital locked in.
This became a stark reality for many property fund investors during the Covid-19 pandemic, when property values plummeted due to government-imposed lockdowns. The ensuing market turmoil left several property funds in trouble, effectively trapping UK investors.
Is commercial or residential property a better investment?
The choice between commercial and residential property depends on your financial goals. Commercial property typically appeals to investors seeking higher returns, longer leases, and stability over the long term. However, it often requires a larger capital investment and is less liquid than residential property, making it more suitable for those with a longer-term horizon.
Residential property, on the other hand, tends to be more accessible and offers greater liquidity.
Whether you opt for direct investment or through funds, there are multiple avenues to explore, with each offering varying levels of risk and reward. As the market continues its recovery, now may be the moment to consider adding commercial property to your portfolio.
