Author: Jake Smith, Date Written: 06/01/2025
Year-on-year house price growth currently stands at 4.7% higher than December 2023, marking the fastest pace since October 2022. The average price of a house is now £269,426, just below the record high reached in summer 2022. Interestingly, the highest price rises are observed in Northern Ireland, with a 7.1% increase, followed by the North, North West, and the Midlands.
This positive surprise comes at an intriguing time. Over the last 12 months, nearly £1 billion has been withdrawn from UK-domiciled funds directly investing in UK property. One notable example is St. James’s Place winding down its £2 billion fund, which had been suspended since October 2023. This follows similar actions from the real estate arms of M&G, Aegon, and Aviva. However, the largest fund, Legal & General, remains open despite flat returns in 2023 and 11% losses in 2022. A key driver behind these closures, aside from risk-adjusted returns, has been increased scrutiny from the FCA, particularly regarding Property Authorised Investment Funds (PAIFs). The regulator maintains that PAIFs are unsuitable investments due to the liquidity mismatch between the asset class and the need for daily pricing.
One potentially attractive asset class for 2025 may be Real Estate Investment Trusts (REITs), as they are sensitive to interest rate changes and tend to outperform the broader market when rates fall. However, their appeal has diminished since the late October budget, which adjusted interest rate projections due to elevated gilt levels. Investors considering REITs must also assess their risk tolerance, as these vehicles use gearing (debt) to enhance returns, thereby increasing volatility.
On the macroeconomic front, Morningstar predicts favourable conditions with strong GDP growth, falling inflation, and lower interest rates. Labour’s government has committed to building 1.5 million homes during its tenure. However, the availability of new developments remains a concern. In December 2024, housebuilding activity fell at the sharpest pace since June, despite the construction PMI remaining at 55.2—above the neutral threshold of 50. This reflects strengthened demand in commercial construction and civil engineering sectors. The next construction PMI report will be released on 4 January at 09:30. In contrast to the overall slowdown, a £250 million joint venture between Oaktree, Greycoat, and Homes England aims to accelerate large-scale development sites across the UK.
Overall, the outlook for the UK property market remains mixed. While recent house price growth and macroeconomic forecasts offer optimism, challenges persist in terms of regulatory scrutiny, liquidity concerns, and construction sector activity. Investors must carefully weigh these factors when navigating the evolving property landscape.
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