Dissecting the UK’s Slump in Goods Trade
Over recent years, UK trade in goods and services has diverged, with goods trade experiencing a notable slump while services continue to grow—a trend with implications for industrial and logistics demand. The downturn in goods trade is largely due to falling exports, particularly compared to the Eurozone and US, with Brexit introducing added costs for EU trade at the start of 2021, though similar declines in exports to non-EU countries suggest other factors are at play. Chief among these is the loss of international price competitiveness, as UK goods have become increasingly expensive relative to imports. This has hindered UK exporters in global markets and driven domestic buyers toward cheaper imports, making net trade a significant drag on the nation’s economic growth in recent years.
Improving the UK’s International Competitiveness
Three main forces have eroded the UK’s pricing competitiveness, in our view: rising labour costs due to persistent supply constraints and higher payroll taxes, a stronger pound making exports pricier and imports more attractive, and elevated electricity prices—the highest among International Energy Agency members—driven by external shocks like the war in Ukraine. However, there are grounds for optimism: the pound has started to depreciate against the euro, making UK goods more affordable, and recent government actions—including trade agreements with major partners and the new industrial strategy’s British Industrial Competitiveness Scheme to reduce energy costs for manufacturers—are intended to bolster the nation’s competitive edge.
The Government’s Growth Predicament
Faced with fiscal constraints, the UK government has sought to stimulate economic growth through low-cost measures, such as structural reforms and financial sector deregulation, as highlighted in the recent Mansion House Speech. While reaffirming its commitment to strict fiscal rules to reassure bond investors, the Chancellor offered little detail on future plans ahead of the Autumn Budget. Nevertheless, despite efforts to boost growth within these tight boundaries, ongoing uncertainty around public finances underscores the need for a more fundamental rethinking of fiscal policy.
Encouraging Signs Amid Challenging Conditions
Despite ongoing geopolitical uncertainty, tariff volatility, high bond yields, and a challenging economic climate, the UK commercial real estate market has shown remarkable resilience this year. Investors remain selective, but are buoyed by steady recovery in average capital values, driven by robust leasing fundamentals. Office sector leasing in UK cities hit a post-pandemic high in H1, with take-up 8% above the long-term average, and strong annual rental growth for prime spaces continued. Logistics has also seen a surge, with Q2 big-box take-up reaching its highest level in over three years; while rental growth for prime logistics has moderated, underlying potential remains strong, helping maintain firm pricing, especially in regional multi-let and mid-box markets.
Investment Volumes Paint a Mixed Picture
This occupational market strength has driven stronger investment flows into logistics and office assets so far this year, which grew 17% and 10% y/y in H1 2025 respectively. Aggregate office, industrial and retail volume a 7% uplift overall. Despite this resilience, underlying deal flow is weaker: portfolio transactions now account for 38% of investment volume—well above the 20-year average—and hit a record 64% in the industrial sector, masking the reality that the actual number of deals has dropped to a 12-year low, with sub-£20m individual deals at just half their 10-year average.
Lending Market Providing Reasons for Optimism
Encouragingly, improvements in debt availability and cost are expected to support liquidity and pricing going forward. The Bank of England’s Credit Conditions Survey shows lenders are increasingly confident that commercial property values have bottomed out, resulting in increased credit availability for CRE and a Q2 2025 reading at its highest since 2007. Net Sterling bank lending to property investment firms reached a post-GFC high of £14.5bn over the past year, and banks are tightening margins on prime asset loans, further reducing debt costs as swap rates settle. Historically, such lending activity precedes stronger pricing and investment volume, suggesting that renewed lender confidence and greater debt competition—combined with resilient fundamentals—could drive further liquidity and bolster transactions, offering an encouraging counterbalance to wider market caution.
