Looking Ahead to 2025

As we continue to navigate our way through 2025 and the ongoing effects of the Autumn Budget, Ben Cussons, Business Advisory Partner takes a look at the continuing number of factors impacting this sector.

Following on from the Budget, confidence in the sector – taken from the ICAEW Business Confidence Monitor (BCM) – slumped from its position of relative optimism in Q3 of 2024, to one of caution in Q4 of 2024 as the government expenditure on infrastructure was eased and tax burdens increased.

In fact, confidence in the sector is at its lowest since Q4 of 2022 and 46% of all construction firms cited the tax burden post budget as being the major challenge they will have to overcome in 2025.

This trend of significant and growing concerns has of course hit all sectors hard, however it always feels construction in particular is hit the hardest and takes the longest to recover. First in and last out as I’ve made reference to before.

Signs of stabilisation in the property market amid predicted base rate cuts

Generally, when confidence is low businesses pull back on their capital spend. But despite this caution, there are still some positives.

Prices have stabilised and growth is still being felt in the property market, with capital values increasing by 1.3% in Q4 of 2024 and at 2.8% across the complete year.

The residential property market is still finding it tough as it seems purchasers are continuing to wait on further cuts to the base rate, with some experts expecting up to seven cuts this year.

At time of writing, we’ve had one cut so far, with the next review not until 8 May, at which point we will be a third of the way through the year, so perhaps it will be more like three reviews. For context, in 2024 some experts predicted six cuts and we ended up with three so perhaps we should expect another two to possibly end the year with a base rate of 4%.

This will be of course subject to inflation and whether we can get anywhere near the Government target of 2% remains to be seen.

Then there’s the matter of increases to the National Minimum Wage and Employer’s National Insurance. And as businesses try to absorb these increases, coming into effect in April, they’ll either have to cut back on pay rises for staff or pass this increased cost onto their customers in the shape of higher prices.

In terms of the commercial market, as our shopping trends continue to move away from the high street, the retail sector unsurprisingly sees confidence at a low point too.

However, there’s a pent-up wall of investment waiting to be released – warehousing is seen as the most attractive option in the market at the moment – as well as huge investment in data centres, and real estate continues to be a solid investment.

Green shoots ahead?

Looking further afield into Europe, property prices are on the up following the rebound of tourism after the pandemic. We’re seeing increases in student accommodation overseas too with many students now choosing to study abroad with rises to tuition fees here in the UK.

Following the collapse of the investment market when interest rates rose significantly in 2021, now could be the time for this to come back.

There are some green shoots of recovery.

Outside of London, rents continue to grow with a predicted 4% growth in the market once again expected in 2025 according to Savills research. *Savills UK | Rental Forecasts

According to the ICAEW’s BCM report, businesses across the East of England “plan to increase the rate at which they raise their staffing levels in the year ahead, to 2.0%. An expansion that’s comparable to the national average projection of 1.9% and stronger than the forecast for most regions”.

And the BCM statement suggests that as property value (or Capital Growth) increases due to higher rental income, yields have flattened. So, the returns from those rents (yields) are no longer growing as they did previously – which suggests a more stable (although less profitable) market for investors.

As we look ahead to the remainder of 2025, the outlook for the construction and property sectors remains mixed. While challenges such as increased tax burdens and fluctuating confidence levels persist, there are areas of optimism.

As businesses adapt to rising costs and economic pressures, there are signs of cautious recovery, particularly across our region. And with careful planning and strategic investment, businesses can work to navigate these challenges and capitalise on emerging opportunities.