Operational Real  Estate

January 2025 Forecast

Robust operational performance in hotels and leisure

The hotel industry is expected to maintain strong performance, with RevPAR growth driven by increased occupancy from returning corporate demand. With the economic environment stabilising, operators are expected to increase profitability and counterbalance ongoing inflationary pressures.

Despite a squeeze on consumer spending, the stable leisure trading and operator environment will drive investment activity. Demand for experiential leisure continues to be strong.

Mid-year review

• The hotel sector is now expected to see marginal RevPAR growth across the UK, still driven by an occupancy-led strategy, rather than ADR, due to the headwinds brought on by geopolitical and economic uncertainty. The challenge for operators is maintaining the growth in revenue, thereby offsetting increasing operating expenses to maintain profit margins.
• Experiential leisure demand remains high. However, the impact of the Employer National Insurance and the National Living Wage rises has impacted prices and demand in other subsectors. Premium ends of the health and fitness market have continued to outperform.

January 2025 Forecast

Healthcare investment set to rise

Healthcare investment volumes will continue to increase in 2025 following a surge in activity in H2 2024, driven by increasing demand and needs. Strong operational performance, attractive lease features, and improving investment market conditions for a growing buyer pool continue to attract investors to the sector.

Demand for senior housing continues to grow, however a shortage of suitable properties is constraining uptake where demand outweighs supply. There remains strong demand for established, well-operated schemes, with re-sales expected to perform well in 2025.

Mid-year review

• Investment activity started more slowly than expected in 2025, as transactions have been taking longer. This reflects the wider real estate investment market trends.
• However, there is currently more capital targeting UK healthcare than there are available opportunities, creating pent up demand, especially for larger platforms with growth potential. We expect this to spur healthcare investment volumes across the risk spectrum in H2, in addition to a widening buyer pool with increasing focus from overseas buyers, most notably North American.
• Delivery of new senior living developments has slowed, driven by delivery costs and uncertainty over wider residential market performance. Re-sales performance at existing villages continues to be robust and the sector is increasingly able to demonstrate long-term durable cash flows.

January 2025 Forecast

Increased demand for self storage and roadside assets

The UK self storage market continues to gather positive momentum with multiple large scale platform transactions anticipated over the next 12 months. As customer awareness of the service offering increases, demand is expected to rise even more.

There is a renewed sense of optimism across the Roadside & Automotive sector as investment activity gradually increases and the electric vehicle sector continues to grow rapidly. We expect Petrol Filling Station (PFS) yields to gradually move throughout 2025 as investment transaction volumes across the wider market increase.

Mid-year review

• Investment activity in the self storage sector in H1 2025 has been more cautious, largely in response to broader economic uncertainty. However, mid-scale opportunities continue to attract private equity, institutional, and international investors. A clear shift in investor preference has emerged, favouring income-generating assets underpinned by high quality real estate fundamentals.
• PFS yields have continued to compress, accompanied by an increase in investment volumes. There has been particularly high demand in H1 for strong covenants and long leases to supermarkets and oil companies are sought after. As anticipated, investment volumes in car parks have risen, and we expect this upward trend to continue into the second half of the year.

New capital flows

OPRE’s market share within total real estate investment continues to grow, reaching 19% in 2024. This sustained performance, even amid economic uncertainty, highlights the sector’s resilience. We anticipate a rebound in transactional activity in the latter half of 2025, with opportunities for a broadening of capital to enter the market.

Insurance and infrastructure capital

The strong funding position of UK Defined Benefit pension schemes has accelerated growth in the Pension Risk Transfer (PRT) market, where liabilities are transferred to insurers. In 2024, nearly 300 scheme buy-ins completed, worth £50bn. One consequence for commercial real estate is investment by insurers, either directly or through external managers, in structures that are matching adjustment compliant. We expect this expanding market to open a range of opportunities for OPRE as investors seek to maximise value via OpCo and PropCo models and debt structures. In the senior living sector, we have seen Audley Group secure nearly £40m in a sector-first ground rent deal with BlueWater Capital, arranged for a leading UK insurer.

We anticipate an increase in infrastructure capital entering the market in H2 2025. This rising confidence is evidenced by recent take-private bids for two listed healthcare REITs by an infrastructure fund, as well as competitive bidding observed in the Marina sector.

The quasi-infrastructure nature of car parks draws strong interest from investment and infrastructure funds. Investors are seeking resilient, inflation-protected cash flows in sectors with long-term growth potential.

Operational performance

The durability of cashflows in OPRE sectors is driving investor confidence. Despite rising operational costs, our analysis of over 1,000 OPRE assets from 2019 to 2024 revealed sustained growth in both revenue and EBITDA. Care homes have experienced 12% annualised revenue growth, and pubs 8%. Across sectors, operational performance has emerged as the primary driver of capital values, with continued occupational strength expected to support further investment in H2 2025.

Figure 13: UK OPRE investment volumes (£m)