This year has been marked by undeniable challenges, with investment volumes hovering at historic lows.

However, there are glimmers of hope emerging, signalling a potential turning point on the horizon.

Green shoots of recovery

Despite the headwinds, key indicators suggest that the market may have bottomed out.

MSCI's and CBRE’s property capital value indexes hints at a nascent recovery, and while yields held steady throughout much of 2024, we anticipate improvements in the coming year.

This cautious optimism is underpinned by a surprisingly resilient economy.

Inflation has been tamed, prompting the Bank of England to initiate interest rate cuts.

A projected 1 to 1.5% rise in GDP growth in 2024, fuelled by price stability, rising real incomes and easing debt burdens, is expected to continue into the new year.

The recent change in government, ushering in a Labour administration after a 14-year hiatus, has introduced new policy dimensions.

The "Invest 2035" strategy, with its focus on sustainable development and regional growth, is set to reshape the investment landscape.

Regional markets, particularly in the North, are poised to benefit from increased government investment and infrastructure projects.

Furthermore, the revised National Planning Policy Framework (NPPF), with its introduction of a "grey belt" classification, will undoubtedly influence development strategies.

Looking ahead

It would of course, be remiss of me not to do some crystal ball gazing:

UK SME lending to rebound:

After a period of suppressed demand due to high borrowing costs – with the weighted average price of new lending to SMEs 7.51% in H1 2024, SME lending is poised for a comeback in 2025.

Falling inflation and interest rates could stimulate borrowing appetite, providing much-needed capital for business expansion and investment.

Challenger banks & specialists set to take the lion's share:

Challenger banks and specialist lenders are expected to capture a significant share of the SME lending market.

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Their agility and customer-centric approach have enabled them to outpace traditional banks in recent years, a trend that is likely to continue.

This follows the share of total gross lending to SMEs by challenger and specialist banks exceeding that of the big five banks in 2023 for the third consecutive year.

Uneven recovery:

The commercial real estate market recovery will vary across sectors with those perceived as undervalued and backed by structural trends likely to outperform others including: logistics, data centres, and build-to-rent.

Tourism has exceeded pre-pandemic levels in London this year and forecasts expect to see higher levels of inbound overnight stays in 2025, boosting investor sentiment in hotels.

ESG takes [more of a] centre stage:

The Labour administration’s focus on sustainability is likely to drive demand for green buildings and energy-efficient properties.

While clarity on Minimum Energy Efficiency Standard (MEES) implementation for non-domestic properties remains elusive, with the expected timelines expected to slip, the demand for green buildings and energy-efficient retrofits is set to surge.

Interest rate normalisation:

Despite a potentially slower pace of cuts than initially anticipated, the gradual normalisation of interest rates should support market recovery and should not prove to be a drag on market recovery.

Office market dynamics:

The rise of remote and flexible work arrangements will continue to shape office space demand.

However, a projected increase in office-based employment, coupled with a shortage of Grade A offices owing to high construction costs and limited debt availability, could drive rental growth in this segment.

Navigating the path ahead

2025 is poised to be a year of dynamic change in the commercial real estate sector.

While challenges persist, the confluence of economic recovery, evolving investor preferences, and targeted government policies creates fertile ground for growth and innovation.

The resurgence of SME lending, fuelled by falling interest rates and the rise of alternative lenders, should further inject momentum into the market.