Half of investors plan to reduce new-build exposure in favour of repositioning existing assets
Institutional investors have grown increasingly cautious about the UK's commercial real estate sector owing to a combination of regulatory pressures, political uncertainty and protracted interest rate conditions, according to research published by specialist bank Investec.
The fourth edition of the bank's Future Living study surveyed 50 major global capital allocators with combined assets exceeding £300 billion who maintain active exposure to the sector.
The results show that three-quarters of respondents perceive political instability as having substantially eroded market confidence. Around six in 10 have raised concerns that the UK may fall behind international competitors if monetary policy authorities do not reduce borrowing costs more swiftly.
Nonetheless, investor sentiment towards the fundamentals underpinning residential property remains relatively stable. Approximately 84% indicated they would either expand or preserve their allocations to the living sector throughout the subsequent five years, suggesting that longer-term demographic trends continue to underpin a belief in the sector's trajectory.
Regulatory frameworks, particularly the Building Safety Act, have emerged as a meaningful constraint on investment activity. Nearly half of all respondents (46%) cited regulatory uncertainty as a limiting factor when considering non-owner-occupied residential investments, a figure that has nearly doubled from the 28% recorded in 2023.
Among the 92% who confirmed that the Building Safety Act is actively shaping their investment approach, three principal challenges have surfaced: heightened compliance expenditure (cited by 68%), amplified administrative requirements (60%) and protracted development timelines (54%). Consequently, three-quarters of investors have modified their asset allocation strategies in response.
Of these respondents, approximately 46% have directed capital away from newly constructed properties towards the remediation and repositioning of existing stock, reflecting the constrained supply of new residential accommodation. However, 88% characterised the Building Safety Act as unlikely to present a fundamental impediment to the sector's expansion over the long term.
Additional findings from the study demonstrated that conditions for capital deployment have markedly strengthened: only 22% now regard the financing environment as problematic, a decline from 45% two years earlier. By contrast, town planning procedures have become a growing source of constraint, with 56% identifying this as an obstacle, up from 37% previously.
The twin pressures of construction cost escalation and the prevailing interest rate regime were identified as the principal barriers to sector growth, with 74% citing the former and 70% citing the latter, though the latter had eased marginally from 76% in the previous survey.
The recently enacted Renters' Rights Act appears to have influenced capital flows: half of investors indicated they would expand their exposure to later-living properties in response, whilst a comparable share stated they would curtail investment in single-family rental accommodation.
"This year's Future Living report clearly identifies the challenging market backdrop and regulatory headaches currently facing investors in the UK Living sector," said Jonathan Long (pictured right), head of corporate real estate lending at Investec. "With pre-Budget uncertainty compounding the challenging fiscal backdrop and the lack of any real progress around proposed reforms to areas such as planning, it's no surprise that investors are feeling more cautious.
"However, there are grounds for optimism. With several of the headwinds viewed as near-term only, and the fundamentals of the UK Living sector – compelling long-term demographic demand and a chronic shortage of high-quality, purpose-built homes – remaining strong, investors are continuing to look through the noise and are positioning themselves for a recovery in 2026."
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