Geopolitical uncertainty continues

As the market lets the dust settle on ‘liberation day’, it should be noted the direct impact of the tariffs on UK trade is fairly limited to specific sectors, but the wider fallout is another hit on business and consumer confidence, damaging an already fragile economic recovery. Real estate is, of course, a GDP-linked asset class, and returns are strongly correlated with the performance of the wider economy, and with many forecasters downgrading GDP forecasts in the wake of recent events, it is possible that occupier demand and, in turn, rental growth, will be hit.

In occupational market terms, it is too early to tell whether companies will take the opportunity to sit on their hands, but investors can be buoyed by the fact that there are very few areas of UK commercial property that currently suffer from a structural oversupply, at least at the prime end of the market.

However, a recent frenzy of diplomatic activity by the UK government has seen improved trading terms with both India and the US, which leaves the door open to a more substantial potential trade deal with the EU later this year. Combined with the BoE cutting base rates to 4.25% recently, the UK may just look like an oasis of calm and political stability when compared to other markets of interest to global investors.

Certainly the numbers add some credence to that theory, with data from RCA showing c.£5.8bn of capital deployed in the first five weeks of Q2 2025, already at 64% of Q1 levels, with over half of the quarter remaining.

How will the industrial and logistics market react to tariffs?

As markets the world over continue to digest the impact of the ‘liberation day’ imposition of tariffs on countries around the world and the subsequent 90-day moratorium, it is worth looking at some of the fundamentals of the UK industrial and logistics sector, which is arguably the area of commercial real estate that will be most impacted.

The first point to note is that Savills agency teams have observed two quarters of increasing occupier requirement levels, and whilst data for the first part of Q2 will be skewed by the Easter holidays, at this stage we are not aware of any occupiers withdrawing from deals due to the impact of tariffs. Indeed, for units over 100,000 sq ft, we are currently tracking 23 units under offer that total just under 6.5m sq ft.

Whilst the direct impact of the tariffs is fairly limited, with just 3% of European exports reaching the US, the bigger risk is a hit to consumer confidence and spending, which, in turn, impacts the retail sector disproportionately, which on average accounts for two-thirds of take-up in any given year. Early indications are that consumer confidence has taken a hit, with data from Which? suggesting that consumer confidence is now at its lowest level since 2022. However, in its most recent trading update, retail bellwether Next has reported an 11.4% year-on-year increase in sales to the end of April, suggesting consumer demand remains strong.

Turning our attention to what may happen moving forward, the only real event we can compare this to is the impact of the Brexit vote on the UK logistics market. What we witnessed in the run-up to major Brexit milestones was the impact of stockpiling and increased urgency regarding decision-making. Whilst there were many other variables in the market at the time, including the growth of online retail, overall we witnessed a V-shaped impact on the market with strong take-up in 2016, followed by a lull in 2017 and a sharp rebound in 2018. With continued uncertainty regarding what happens post the 90-day moratorium, it is possible a similar, but condensed, pattern may emerge in 2025.

The latest edition of Savills Build: Perspective, which launched recently, tracks sentiment for build costs and project delivery timescales across all major segments of UK real estate. Notwithstanding increased levels of uncertainty following ‘liberation day’ in early April and challenges to viability driven by complying with new legislation, we have observed continued stability on a quarterly basis, with our sentiment index broadly stable heading from Q4 2024 into Q1 2025.

As the year progresses, it is difficult to see how geopolitical uncertainties stimulate greater construction output, but the likelihood of base rates falling faster than predicted may improve viability in some cases, which could stimulate demand on a sector-by-sector basis.

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