Property Predictions for 2025.
2025 is set to be a year of greater certainty for both residential and commercial real estate.
On the commercial side, two base rate reductions, and as reported by Savills, a “potential further 100 basis points of cuts, widely anticipated over 2025 and 2026” has the potential to reduce the cost of borrowing across most markets and sectors, thereby supporting business growth and increasing tenant demand.
On the residential side, while the buy to let market is becoming less attractive to landlords, Zoopla’s House Price Index found that the housing market returned to strong growth in 2024, supported by rising incomes and lower mortgage rates. This could lead to a shift towards residential property investment, over buy to let models.
And with businesses nearing net zero targets, 2025 is set to be pivotal in UK real estate’s transition to Net Zero.
With the team at Barwood Capital taking stock of the current market, its experts across commercial and residential property have put forward their predictions for the year ahead.
“Retrofitting will continue to be a key trend to achieve Net Zero by 2050” – Danielle Sheppard, Head of Performance & Impact
With the UK committed to achieving net zero by 2050, considerable attention is being directed towards how this target will be met within the commercial property sector. Much of this focus has centred on the development of net-zero, energy-efficient buildings. However, it is often overlooked that 80% of the buildings expected to exist in 2050 have already been constructed. This raises the question: why isn’t there greater emphasis on retrofitting?
We anticipate that retrofitting will gain prominence on the agenda in 2025, as stakeholders increasingly recognise the necessity of improving the energy efficiency of existing property portfolios. While government incentives to support retrofitting would be ideal, such measures currently appear unlikely. Nevertheless, property investors are beginning to acknowledge the imperative of addressing the sustainability of their assets, as failing to do so may impact valuations and demand—both from tenants and investors. This, in turn, will affect overall asset value.
Additionally, existing legislation, such as the Minimum Energy Efficiency Standards (MEES), already mandates compliance with minimum EPC ratings. Landlords who delay planning for these requirements risk facing significant capital expenditure and the prospect of their assets becoming stranded.
We believe 2025 will mark a turning point for retrofitting existing buildings. However, some landlords may lack the appetite or resources to undertake such improvements themselves, potentially leading to an increase in stock coming to market requiring upgrades. A clear disparity is already emerging between the capital value and rental performance of unsustainable buildings (the “brown discount”) and sustainable, energy-efficient properties (the “green premium”).
This presents a compelling opportunity for astute investors to generate market-beating returns by acquiring underperforming assets and enhancing their sustainability credentials, thereby boosting asset value. This dual benefit—delivering positive environmental impact alongside enhanced returns—represents an exciting prospect, particularly at a time when many ‘green funds’ have faced underperformance.
“Manufacturing is becoming more AI driven and shifting demand from golden triangle out to new regions” – Jonathan Ellerington, Investment Director
A longer-term trend which will continue throughout 2025 and beyond is a need for increased productivity for UK manufacturers as they navigate a host of headwinds.
With increased employment costs, labour shortages, potential US ‘tariff’ costs and flatlining domestic demand, manufacturers are ever more reliant on increased productivity to help navigate these challenges.
Productive sectors need productive property and manufacturing is no different. One solution for manufacturers is to further adopt technological advancements and smart factory technologies, curbing the headwinds in relation to labour.
Although adopting additional technologies is costly, and challenges related to securing the necessary power for such a transition are compounded by well-documented grid capacity constraints, some traditionally less fashionable industrial and logistics locations may provide power while also offering an increased labour supply (if still required) and reduced operational costs in the long term.
In particular, freeports which in some instances will provide these along with their tax incentives are set to be more desirable. Some of these initiatives will require significant upfront investment and longer-term planning for companies which are already facing stringent financial and operational pressures, hence the longer-term nature of the issue. However, we anticipate this to be a continued trend throughout 2025 and beyond.
"We’ll likely see a shift towards residential property investment over buy to let” - Hitesh Patel, Group Financial Controller
The UK buy to let market will continue to face challenges due to a combination of regulatory, tax and market dynamics. This will result in Landlords continuing to leave the Private Rented Sector which invariably could mean increased rents for those renting due to reduced supply.
The “BTL model” which many Landlords were used to no longer works. Recent years have seen the UK government implement measures aimed at reducing the attractiveness of buy-to-let investments. These include restrictions on tax relief for mortgage interest, the removal of the 10% “wear and tear” allowance, an additional 3% stamp duty surcharge on second properties, and accelerated payment schedules for capital gains tax.
In addition, many local authorities are now introducing licencing schemes for all rented properties meaning additional costs and administration for landlords. These policies have increased financial pressures on landlords leading many to exit the market.
This in turn could lead to a shift towards residential property investment, with previous landlords preferring passive income streams, unlike the hands-on management required for traditional BTL properties.
Images by ThisIsEngineering and Oleks Andr via Pexels and Barwood's own.