The UK real estate market is entering a period of cautious recovery but one increasingly defined by divergence. That is the central message from OakNorth’s latest Sector Pulse report, which suggests that while activity is returning across residential, offices, retail and industrial, structural pressures are reshaping where capital flows and what actually gets built.
Across all sectors, a consistent theme emerges that demand is holding up but only for the right product.
In residential, the market has stabilised rather than rebounded. House price growth has slowed to around 3.2% as affordability continues to bite, particularly in London where prices have remained flat year-on-year. Transactions are holding up near pre-pandemic levels, supported by wage growth and improving mortgage conditions, but the recovery remains fragile.
The more interesting story, however, is in rental housing. Build-to-rent continues to attract strong institutional interest, with North American investors accounting for nearly half of capital deployed in the first half of 2025. At the same time, the geography of delivery is shifting. More than 80% of BTR investment is now happening outside London, led by cities such as Manchester, Birmingham and Leeds, a trend that underlines both affordability pressures in the capital and the growing maturity of regional markets.
Yet even as capital flows in, delivery remains constrained. Completions are forecast at around 230,000 homes this year, still well below the government’s 300,000 target as developers grapple with rising costs, planning delays and regulatory hurdles.
Rental growth, meanwhile, is beginning to cool, with new lets rising by just 2–3% annually. But broader rental inflation remains elevated as older tenancies reset, keeping affordability stretched across much of the country.
Looking ahead, OakNorth expects only modest price growth of 1–3% over the next six months, with demand stable but highly price-sensitive. The implication is clear: the structural shift towards renting is intact but the delivery model is under strain.
Offices recovery underway
The office market is showing clearer signs of a turning point. Investment volumes rose 24% year-on-year in the first half of 2025, driven largely by overseas capital, particularly in London. At the same time, utilisation rates have climbed to five-year highs, reflecting a stabilisation of hybrid working patterns. Occupiers are no longer shrinking footprints in some cases, they are expanding again, albeit into different types of space.
But this is not a broad-based recovery. Instead, the market is increasingly bifurcated. Around 65% of leasing activity is now concentrated in grade-A buildings, with occupiers prioritising sustainability, design and amenity-rich environments. The result is a widening gap between prime and secondary stock.
With nearly 70% of UK office space now considered below grade A, a significant portion of the market faces obsolescence risk particularly as ESG requirements tighten. Over the next six months, this is expected to drive a wave of repositioning, retrofitting and conversion.
Older offices are increasingly being targeted for refurbishment or repurposing, including conversion to residential, particularly where vacancy remains high and housing demand is strong. At the same time, demand is emerging for smaller, flexible workspaces in suburban and commuter locations, reflecting the persistence of hybrid working patterns.
The direction of travel is clear: quality and adaptability will determine value.
Industrial and retail increasingly selective
Industrial property remains one of the most resilient sectors, but even here the picture is becoming more nuanced. Vacancy rates have risen above 7%, the highest level in a decade as speculative development has outpaced demand in some markets. However, much of this stock is modern and high-quality, meaning landlord sentiment remains relatively strong.
Demand continues to be underpinned by logistics, manufacturing and ESG-compliant facilities, alongside policy tailwinds such as defence-related investment. The investment story is increasingly focused on value-add strategies, refurbishing and upgrading existing assets rather than relying on new supply.
Retail, meanwhile, is undergoing a more selective recovery. Leasing activity has picked up, with prime high streets and retail parks seeing improved performance, while secondary locations continue to struggle. Retail parks have emerged as standout performers, benefiting from low rents, strong occupier demand and alignment with omnichannel retail strategies. Investment volumes have stabilised at around £4bn, with strong interest from international capital in prime formats.
But the divide is stark: while best-in-class assets are attracting capital and driving rental growth, weaker locations remain under pressure from structural shifts in consumer behaviour.
Image: ©Adobe Stock
Send feedback to Akanksha Soni