£15B Defence Spending Boost Expected To Create 30M SF Of UK Real Estate Demand

People don’t tend to listen much to a prime minister with only a few weeks left in office. 

But when Keir Starmer stood up last week and spoke at a BAE Systems site in Maidenhead, 30 miles west of London, the real estate sector pricked up its ears. 

Starmer announced a £15B increase in defence spending for the UK over the next four years, with further plans to increase the proportion of GDP it allocates to defence in a world of shifting geopolitical certainties. 

And that is being grasped as an opportunity by a real estate sector desperate for areas of growth in a market that has slowed to a crawl due to high interest rates and moribund economic expansion. 

Increases in defence spending could create more than 32M SF of real estate demand in the UK, according to data from BNP Paribas Asset Management Alts shared with Bisnow, including about 14M SF of new logistics demand. 

It is a big potential boon for real estate. But that demand will not be spread evenly around the UK, so investors and developers need to pick the right strategy to tap into the growth that defence spending will bring. 

The UK spent 2.3% of its GDP on defence in 2024-2025, a figure that will rise to 2.7% by 2028 under the new plans announced by the government, with a goal of reaching 3.5% by 2035, the target for NATO countries. 

BNP Paribas AM Alts’ estimates predicted that an increase to 2.9% by 2030 would add 35M SF to UK real estate demand. At 2.7%, that figure would come in at around 30M SF. 

“Europe’s transition from decades of underinvestment in defence toward greater strategic autonomy represents one of the most significant fiscal turning points in recent history, with far-reaching consequences for growth, industry and real assets,” BNP Paribas AM Global Head of Research and Strategy, Alts Justin Curlow and senior research analyst Kerrie Shaw wrote in a paper on the topic.

Demand for new defence real estate will focus on existing clusters of expertise, which are spread across seven main areas of the UK, Curlow and Shaw said. Major industrial and logistics markets are those that investors should be targeting, they said. 

Those areas include Scotland, where Glasgow and the west coast are centres of shipbuilding, while Glasgow and Edinburgh have cyberdefence and emerging technology clusters. The north-west has several vehicle/land system companies in the region, including MBDA and Rheinmetall, while the south-west hosts several aerospace and defence electronics companies, including Thales and Rolls-Royce. The M4 corridor is home to several missile and air defence companies. 

London is, of course, also a major centre, particularly when it comes to research and development in sectors like cyberdefence and emerging technologies. 

The announced Defence Investment Plan had a greater focus on drone and unmanned vehicle capability than plans outlined even a few years ago, and the changing nature of modern warfare will influence the type of real estate growing defence companies require.

“Investors and landlords are increasingly looking at defence-related manufacturing, drone technology, aerospace, logistics and supply chain occupiers as growth areas,” Savills Director Robert Pearson said. 

“However, security requirements and restrictions around ownership and occupation mean that not all assets or landlords will be able to access this demand.”

Many of the companies looking to grow will require bespoke, highly technical facilities. Developers might be willing to produce these on a build-to-suit basis, but they may prefer to target properties that are a little less specialised and thus could one day be let to a different occupier. 

“There may also be stricter oversight of construction and planning,” BNP Paribas AM said. “This can significantly increase time for construction and construction and fit-out costs.”

Savills estimated that fit-out costs could be 20% to 40% higher for defence-occupied space than for standard industrial space, for example.

Then there is the question of ownership. Many companies in the defence sector are undertaking classified work, and thus are more likely to own rather than lease assets. At the very least, they will want to work with a small number of preferred partners. 

Perhaps the best strategy for real estate investors is to look beyond defence companies themselves and tap into the supply chains that will build up around manufacturers to serve them. These companies don’t exist in isolation, and suppliers will gravitate toward them and expand as they grow.

BNP Paribas estimated that about 18M SF of new real estate demand is likely to come from the manufacturing sector, with about 14M SF coming from logistics. Manufacturing is bigger, but logistics might be easier to access. 

“Leasing standard, modern industrial and logistics units to the large number of defence related suppliers may offer investors better risk-adjusted opportunities than renting to defence manufacturers directly,” Curlow and Shaw wrote.