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Annual capital growth in the UK commercial real estate (CRE) market turned positive for the first time since 3Q22 by the end of last year. In 1Q25, capital growth accelerated, hitting 1.4% on an annual basis. That may sound small, but income return boosted the annual total return to 6.3% on a non-levered basis during the same period.

Is 6.3% an attractive return? It depends on, e.g., how one defines risk – let’s not get into that now, but you can look at the importance of how risk is defined in our latest The Red Thread for Private Markets – and how other asset classes are performing. After all, one invests in real estate expecting a certain level of return relative to other asset classes.

The go-to asset class for assessing whether CRE returns are attractive or not is government bonds. Considering the long-term perspective, the UK 10-year government bond has delivered an annual return of 3.7% (as of 1Q25), since the beginning of 2001. Over the same period, UK CRE has returned 6.1% p.a. – a difference of 240 basis points.

The current rate of the UK 10-year government bond is around 4.5%. If you require a similar additional return to what the UK CRE market has delivered since the beginning of this century, you could expect around 7.0% in non-levered total return.

7.0% might sound like a lot, but there are multiple segments of the CRE market that are already delivering that return to investors. Figure 1 shows that the 12-month total return of various subsectors in the UK, ranked by the median return as of 1Q25. The interquartile range is included as grey bars.

The median retail warehouse is delivering an annual total return of 12.0% as of 1Q25. The median logistics facility has delivered an annual total return of 8.6% over the same period. These sectors are arguably delivering attractive returns from a historical perspective and when compared to the rate of government bonds.

Importantly, the interquartile range can be wide: 25% of shopping malls delivered less than 3.4% in annual total return as of end of March, while 25% of shopping malls saw their annual total return reach 15.6% or more. This is why we keep hammering the point that asset selection matters: delivering attractive risk-adjusted returns is not only about selecting the right market, but also the right asset.

Of course, those are backward-looking numbers. But, encouragingly, in our latest forecast, we see total return at the all-property level climbing to 7.0% p.a. over the period 2025-2029, higher than the aforementioned total return of 6.3% as of March. We’re not alone in expecting an improvement in the UK CRE returns: the Investment Property Forum consensus forecast report from May places the all-property annual total return at 7.9% for 2025-2029. Importantly, we see sectors such as industrial and retail delivering a total return of ca. 7.5% over that period.

So, is the UK CRE market offering attractive returns? Compared to government bonds and the historical return differences between those asset classes, one can easily argue that it is. Particularly when applying a robust research and asset selection process.