UK real estate market outlook Q3 2026

UK economic outlook

Activity

The first quarter of the year registered 0.6% GDP growth, although the effects of the conflict in Iran meant that part of this expansion reversed during April to 0.1%. Broader activity points to sluggish sentiment, however the UK should avoid a more pronounced slowdown. The labour market is still relatively weak and real incomes are due to slow as energy price increases come through. There are few drivers for a rebound in growth over the near term and fiscal tightness further restricts activity.

Inflation

The conflict in Iran isn’t necessarily feeding into inflation expectations with the severity that economists initially expected. Headline inflation was softer than expected during May, posting a 2.8% increase. Services inflation came in slightly higher at 3.7%, given higher airline prices. Looking ahead, expectations are that inflation will jump as higher energy prices feed through, although this should be relatively short-lived. Protecting against a more severe increase in inflation is weaker activity and workers’ limited wage power to resist the hit to real incomes. 

Policy

The Bank of England (BoE) is expected to keep rates on hold at 3.75% throughout the rest of the year. While this marks a clear shift from the two 0.25% cuts that were expected at the start of 2026, prevailing financial conditions should prove disinflationary enough to curtail the need for any rate hikes. Provided inflation evolves in line with expectations, including any second-round effects, and economic growth doesn’t overly deteriorate, we would expect the BoE to resume its gradual rate-cutting cycle next year.

Figure 2: UK economic forecasts

Source: Aberdeen, June 2026
Forecasts are a guide only, and actual outcomes could be significantly different. 

UK real estate market overview

UK real estate returns softened to 6.1% over the 12 months to May¹, with the latest monthly return of 0.3% the weakest since March 2024. Income remains the main support to performance, while capital growth was negative for the third consecutive month at -0.1%. Retail continues to lead with annual returns of 8.4%, dragged higher by the high income-yielding shopping centre segment. The broader recovery seen over the past 18 months is losing some momentum, as rental growth slows across sectors, industrial returns soften, and some segments are under pressure from yield expansion. There are segments that we are positive about, however performance will be polarised by quality and location. 

Investment activity remained subdued over the first half of the year. UK transaction volumes were £9.2 billion in the first quarter of 2026, down 15% year on year and around one third below the post-2012 quarterly average². This marked the weakest first-quarter figure since 2012, underlining the continued caution among buyers and sellers. Momentum has softened further in the second quarter, with volumes of £6.2 billion recorded to date, around 41% below the same quarter last year. While the UK continues to screen as a relatively liquid and defensive market for international capital, elevated macro and geopolitical volatility is likely to keep decision-making protracted. This will limit any meaningful recovery in transaction activity until there is greater clarity on rates, pricing and the wider economic outlook.

UK real estate market trends

Offices

While the office sector’s returns lag all property, the polarisation in the sector is clearly evident across locations and by quality. Focusing on the headline total return figure of 2.8% in the 12 months to May is slightly misleading for the areas of the market that are outperforming. For example, in the core central London submarkets, the West End and Mid-Town submarket had a 6.8% return during the same time period³. Offices in out-of-favour locations and those that fail to meet modern occupier preferences will continue to erode value. 

The central London submarkets are seeing strong occupational demand in well-located buildings and take-up is back to its long-term average. Market-level rents are increasing at pace, given the shortage of appropriate stock, with City rents growing by 8.5% over the year to April⁴. Compared with recent years, market-level rents in the West End rose at a slower pace, although still positive at 4.8%. Prime rents remained strong, increasing 12.5% in the West End and 5.1% in the City during the first quarter⁵. The core submarkets and best-quality buildings are the focus of demand in central London, whereas fringe locations are seeing more tepid leasing and weaker net absorption.

Investment volumes have been recovering slowly, although the first half of 2026 has been exceptionally slow. Nationally, investment was down 30% on last year’s volumes during the second quarter⁶. This was mainly a result of lower office transactions, which were just £1.1 billion in the second quarter – the weakest three-month period in over 20 years. Notably, Barclays purchased its Canary Wharf headquarters for £750 million at the start of the third quarter, continuing a trend that sees occupiers prioritising the space they have amid tightening supply.

Industrial and logistics

Over the 12 months to May 2026, the UK industrial sector delivered a total return of 6.7%. This maintained its position as one of the stronger-performing sectors within the MSCI index, albeit below the levels seen during 2025. Returns remain overwhelmingly income-driven: income contributed 4.9% of the 6.7% total return, while capital growth slowed to 1.7%. The gap between the South East and regional industrial markets remains evident, with industrials in the rest of the UK outperforming on an annual basis. This generated returns of 8.2%, compared with materially lower returns in the South East. The divergence reflects stronger income returns and more supportive capital growth across regional markets. This reinforces the relative attractiveness of well-located regional logistics assets in an environment where income remains the primary driver of performance.

Supply in the industrial and logistics sector is more nuanced than it has been, particularly across size bands. Standard industrial units are in a favourable position, as vacancy rates are at a relatively tight 4.7%⁷. This compares with a mid-box (20,000-100,000 square feet [sq ft]) vacancy rate of 6.8%. There has been more consolidation in this segment of the market, as economic headwinds have affected more occupiers. Meanwhile, big-box (over 100,000 sq ft) demand has been strong. Take-up over the first half of 2026 has been the strongest on record, apart from the Covid years, up 19% on the pre-Covid average⁸. Activity is increasingly driven by third-party logistics providers, retailers, and the emergence of defence companies. The national vacancy rate for big-box assets sits at a reasonable 5.5%, above its 10-year average of 3.5%, as low-specification and poorly located buildings have fallen out of favour⁹. 

Investment volumes have fallen over the first half of 2026, with just £1 billion transacting in the second quarter. This was down 50% from the long-term quarterly average¹⁰. North American capital has been especially slow, with large private equity companies remaining on the sidelines. Prime distribution warehouses started the year with relatively low yields. This made them one of the few segments where yields rose this year, increasing by 10 basis points (bps) to 5.35%¹¹. 

Retail

Consumer spending is likely to remain under pressure over the coming quarters as households contend with a weaker economic backdrop. Consumer confidence remains firmly negative at -23 (net balance)¹², with recent surveys highlighting growing pessimism around personal finances and major purchases. Labour market conditions have softened materially over the past year, with unemployment nearing 5%¹³. Job vacancies continue to fall and wage growth is only marginally ahead of inflation. While households entered the year in a relatively healthy financial position, higher energy costs and renewed inflation expectations are expected to erode purchasing power and reinforce cautious spending behaviour. Against this backdrop, retailers are likely to find it increasingly difficult to pass through cost increases in full. This leaves discretionary categories more exposed and favours value-led operators, discounters and grocery formats.

The retail park segment is benefiting from healthy demand against low supply, leading to historicly low vacancy rates of nearly 2%¹⁴. We remain positive about the segment, especially for good-quality parks with a diverse tenant base. Prime shopping centres are performing well, along with prime retail strips in central London, such as Bond Street and King’s Road. Rental growth is particularly strong in luxury segments, while less affluent areas struggle. We expect this divergence to continue in the near term as real wages stay muted.

We have strong convictions about supermarkets and grocery-anchored retail parks, as we expect discretionary spending to struggle. However, we have ongoing concerns surrounding some operators given poor trading results and shifts in market share over recent years. Capitalising on this reshuffling, Lidl and Aldi are generating competitive pricing among the market leaders, including Sainsbury’s and Tesco. Aldi is now the fourth largest supermarket operator in the UK by market share¹⁵.  

Living

Returns in the residential sector slowed to 5.4% during the first half of 2026, as capital values slipped¹⁶. Legislation affecting the ground rent segment caused a significant repricing. We also saw repricing in the purpose-built student accommodation (PBSA) segment, as occupancy and affordability pressures increased. We expect to see further outward yield movement for PBSA in 2026, which will continue to weigh on the residential sector. Meanwhile, we are positive about the single-family rental (SFR) segment, given its more robust demographic base and lower operational costs.

Rental affordability is currently the key denominator across slowing returns. For the build-to-rent (BtR) segment, this is showing up unevenly across markets. In larger cities and southern regions, where rental growth has been exceptionally strong, rents are now moderating. In some markets where affordability is particularly stretched, rents are in slight decline. As real wages are expected to stay muted over the next 12-to-18 months, we would expect rents to behave in a similar way and stay soft. That said, elevated mortgage rates – 4.74% for an average fixed mortgage at 75% loan-to-value, up from 3.9% in January – will help to sustain rental demand¹⁷. 

The PBSA segment is facing more significant headwinds, as affordability concerns are combined with a genuine slowdown in demand. The latest data on sponsored-visa applications points to a clear decline in overseas students applying for UK universities, down 16% from 2024’s levels to just 50,000 students. This challenging outlook is compounded by domestic fees declining significantly in real terms, and by the fact more price-sensitive domestic students are choosing to stay at home rather than live in PBSA. Until demand and pricing normalises, we will remain cautious about this segment.

Despite short-term friction, we have long-term conviction in the UK’s living sector. Supply remains constrained, and the Renters’ Rights Act is likely to further discourage some smaller landlords from expanding portfolios. Recent data from RICS shows landlord instructions remain materially lower at -28 (net balance), while tenant demand is outstripping supply. This suggests rental markets are likely to remain structurally undersupplied, even as affordability pressures temper rental growth.

Outlook for risk and performance

Our outlook for the UK has improved as the situation in Iran has become clearer. While further disruption is certainly possible, and inflation expectations are higher than at the start of the year, the total impact should be less severe than initially feared. The shifting domestic political scene is, perhaps, more significant for the second-half of this year. A change in leadership and cabinet is leading to renewed speculation around policy, taxation, and direction. So far, gilts have been relatively sanguine about Andy Burnham’s expected rise to power. But there’s a risk that a deteriorating fiscal situation will maintain upward pressure on real estate yields and lead to wide-ranging tax increases affecting different sectors.

Despite various headwinds, we are positive about a number of segments in our forecasts. We maintain conviction in the more defensive areas of retail, including supermarkets and well-balanced retail parks, given a challenging environment for the consumer. Additionally, as development starts are dwindling, rental growth for prime assets will generally be better supported by a lack of current and future-looking supply. We expect the residential and industrial sectors to underperform over the short term, given slower rental growth prospects and regional affordability concerns – although both are underpinned by positive supply dynamics.