Research from international real estate advisor Savills points to a gradual recovery in the UK construction market into 2027, although the pace of improvement is expected to vary significantly between sectors. Positively, the Savills Build: Perspective Index, which monitors sentiment on build costs and programme timescales across 64 UK markets and sectors, is forecast to fall from 36 to around 10 by the end of 2026.
The expected fall suggests that the initial pressure on build costs and programme timescales is waning. However, subdued economic growth, cautious investor sentiment and elevated financing costs continue to constrain project viability across the construction sector.
Savills states that Q3 data supports this outlook, with total construction output increasing by just 0.1% in July. Growth was dependent on repair and maintenance, while new work declined by 0.4%. As winter approaches, rising energy prices are expected to place further upward pressure on inflation and some input costs.
The firm notes that competitive tendering is, however, helping to contain cost inflation as contractors accept lower margins, meaning the overall picture remains one of cautious stability. While the first Budget of the Burnham era was met with a relatively stable market response, it is too early to assess its impact on the prospects for stronger economic growth. Savills suggests that, combined with the Bank of England’s latest interest rate rise, development viability is likely to remain challenging, particularly for speculative development, placing greater emphasis on refurbishment and value engineering strategies.
In the Central London office market, the average City prime rent stood at £128.05 per sq ft at the end of Q3, up 25% year-on-year, while Grade A space accounted for 93.6% of take-up. However, construction inflation, labour and mechanical and electrical engineering shortages, combined with increasingly complex compliance requirements, continue to limit new development starts. Savills says this could create an opportunity for developers able to deliver high-quality space into a thinning future pipeline.
Demand also remains resilient in the UK industrial and logistics market, although higher material costs continue to affect viability. Changes to UK steel tariffs came into force on 1 July, while the price of steel has risen by approximately 13% over the past 12 months. Extreme summer temperatures are also prompting greater consideration of cooling, ventilation and other building specifications that protect workforce productivity and support increasingly automated operations.
In the science sector, the growth of AI enabled research is changing occupier requirements, increasing demand for power, cooling and enhanced structural capacity. Savills says these more complex specifications are adding to development costs and creating challenges for existing buildings, reinforcing demand for flexible space that can accommodate evolving technologies and research models.
Across the living sector, construction and financing costs continue to limit the viability of new development. In the Purpose Built Student Accommodation (PBSA) market specifically, Savills is seeing greater interest in established assets that can be refurbished and repositioned. Almost three fifths of existing PBSA beds across Russell Group cities were built before 2015, creating opportunities to improve older, well-located assets while potentially maintaining rents below the level required to support new development.
Simon Collett, Executive Director and Head of Professional Services, Savills, says: “Global issues have, once again, impacted the UK construction sector. Whilst our index readings in 2026 have shown upward pressure on build costs and timescales the impact has not been as destabilising as first feared. Development viability remains the issue of the day and build costs are just part of the viability equation, but with inflation and financing costs trending upwards it is likely we will see a greater emphasis on refurbishment and value engineering strategies.”
