UK real estate market outlook Q4 2026

UK economic outlook

Activity

Economic activity remains subdued, with soft labour demand and limited near-term growth catalysts. Payrolls are falling, vacancies are drifting lower and private-sector regular pay growth has moderated towards a pace consistent with the Bank of England’s (BoE) inflation target. Economic resilience has been firmer than expected, though, increasing the Monetary Policy Committee’s sensitivity to further inflation pressure. We expect weak labour demand and constrained real incomes to limit the risk of a more pronounced acceleration in wages and domestically generated prices.

Inflation

Headline inflation increased from 2.9% to 3.1% in August, driven almost entirely by higher energy prices. Underlying inflation remains more reassuring: core inflation held at 2.6% and services inflation was unchanged at 3.4%, while softer labour-market conditions should constrain second-round effects. However, the Ofgem price cap is set to rise by 4% in October and, if wholesale prices remain elevated, household energy bills could increase materially in January. Together with higher pump prices and indirect cost pass-through, this could push the Consumer Price Index (CPI) close to, or above, 4% early next year before the energy shock eventually fades.

Policy

The BoE held interest rates at 3.75%, but the 6–3 vote and hawkish communication suggest that the policy debate has shifted towards the timing of further tightening. We expect 0.25% rate increases in November and February, which would take interest rates to 4.25%. Policymakers are looking to contain second-round effects before they become embedded. We don’t expect a prolonged hiking cycle, given benign underlying inflation and weak labour demand, although interest rates are likely to remain at 4.25% for much of 2027 and settle above 3% over the longer term. The BoE also reduced the annual pace of quantitative tightening from £70 billion to £46 billion and will cease selling long-dated gilts. This should ease pressure at the long end without signalling a broader loosening in monetary policy.

Figure 2: UK economic forecasts 

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

UK real estate market overview

Total returns slowed to 5.1% over the 12 months to June, essentially representing an income return as capital growth slowed¹. There is a bigger spread emerging between sectors, as headwinds are showing in rental and capital growth. Retail has led performance over the past year, benefiting from higher income returns and the defensive qualities of supermarkets and retail parks. By contrast, residential has struggled to stay in positive territory, returning -0.2% over the same time period. 

Investment volumes slowed in August, falling around 25% year on year to £25 billion². Geopolitical headwinds weighed on investor activity over the first half of the year. As interest rate rises have become more likely, we don’t expect a strong recovery in activity towards the end of this year. Instead, investors are likely to be more cautious around pricing, given the levels global bonds have reached. That said, there are pools of capital that are still active and they are under pressure to deploy. For instance, net investment by institutions is the highest it has been in over a decade at £1.5 billion, following years of net selling. 

UK real estate market trends

Offices

Office returns have been improving, led by central London submarkets. As a whole, the sector returned 4.8% over the 12 months to June, compared with All Property’s 5.1%³. This more closely resembles the sector’s income return, as capital values in less favourable submarkets are dragging less on returns. Rental growth has been the key differentiator, as core central London submarkets continue to experience robust demand, while peripheral markets struggle with higher vacancy rates amid softer demand. Despite this outperformance, we expect outward yield movement to affect the whole sector due to persistently elevated gilt yields. Indeed, indications suggest prime City and West End yields moved out by 15 basis points during August⁴.

Annual net absorption across the UK was positive through the second quarter at two million square feet, owing to a strong second half of 2025⁵. Meanwhile, the national vacancy rate is elevated but relatively stable at 9.1%, most of which is embedded in lower-quality buildings in out-of-favour markets. We know demand is focused primarily on central London locations as well as best-in-class buildings across the Big Six markets. That said, there is increasing evidence of demand re-entering select business parks in the South East. We still favour the central London submarkets, where certainty of demand is strongest. Leasing volumes across the City and West End are at or above their respective long-term averages, despite most demand being focused on the best two thirds of buildings⁶.

The West End submarket in central London has seen consistent mid-to-upper single-digit rental growth over the last three years. The year to June has been no different, seeing 6.2% growth as a market average⁷. Prime rental growth has been stronger at 15.2%⁸. This will help to offset further yield movement as prices adjust to a higher-for-longer environment. The City has similar fundamentals, although prime rental growth isn’t as strong as the tighter West End market. Still, we are positive about these central submarkets over a longer timeframe, given the lack of supply and challenging development economics. The Big Six markets are also seeing strong prime rental growth with limited supply, but they lack the same depth in occupier markets. As a result, we also expect values to move in these markets, despite their relatively higher yields in the prime area of the market. 

Investment volumes have slowed noticeably over the course of 2026, as macroeconomic and geopolitical headwinds take hold. Volumes were £6.9 billion over the first nine months of the year⁹. Although this total is just 4% off the same period in 2025, the third quarter’s volumes were 22% lower than the same quarter of 2025. Central London isn’t shielded and has seen less activity across all sources of capital. This slowdown is expected to continue towards the end of the year as values adjust to a higher-for-longer environment. 

Industrial and logistics

Industrial returns are diverging geographically. The sector returned 5.1% over the 12 months to June, in line with All Property. Lower income in London and the South East meant that returns were 4.4% and 4.1%, respectively¹⁰. This compared with 5.9% in the East Midlands, 6.4% in the West Midlands and 7.3% in the North West. Rising gilt yields add pressure to lower-yielding southern assets, reinforcing our preference for industrials in the rest of the UK, particularly mid-box units (20,000 – 100,000 square feet).

Rental growth is also driving the divergence. London’s vacancy rate is at a 15-year high of 9%¹¹, with double-digit rates in Newham, Ealing, and Barking & Dagenham. Market rental growth has consequently slowed from almost 10% year-on-year to below inflation¹². Western submarkets near Heathrow are proving more resilient, but we expect London to underperform the sector over the near term, as more than five million square feet under construction adds further supply pressure.

We are more positive about the rest of the UK, where vacancy rates are lower at 5.5% and net absorption is trending positively, albeit below long-term averages. Construction starts are falling and space underway has halved from 2022 levels to 30 million square feet¹³. A sluggish economy will temper near-term rental growth, but lower rents, tighter supply and slightly higher income yields support regional fundamentals. Wider pricing pressure may still weigh on short-term returns.

As with the wider market, industrial investment volumes were down 35% during the third quarter, compared with the same period in 2025¹⁴. There has been a sustained reduction in activity from cross-border buyers over the last few years as fundamentals have shifted. Instead, more institutional capital is making its way into the market and institutions are net acquirers of industrial stock. This is proving to be an important source of capital as overall volumes moderate.

Retail

Consumer health appears finely balanced, as unemployment has risen to 4.9% and real wage growth continues to decline. Consumer confidence, however, rose to its strongest reading in two years in September¹⁵. Increasing energy bills for households are likely to weigh on sentiment heading into winter. As a result, we expect softer discretionary demand, and we are more favourable towards supermarkets and value-led operators.

The retail sector is naturally higher yielding and offers an important buffer against higher gilt yields. An income return of 5.8% has helped the sector achieve a 7.8% total return over the 12 months to June, outperforming the 5.1% All Property return¹⁶. Robust rental growth persists in retail parks and, more recently, shopping centres, as occupiers search for limited space. Indeed, market rental growth across these formats is running at its strongest levels in over 20 years, at 3% and 4.3%, respectively¹⁷. This highlights a crucial driver of performance: a lack of supply. Just 0.2% of national retail inventory is currently under construction, the lowest level in over 15 years¹⁸. Under sustained occupier demand, vacancy rates are at record lows across retail parks at 1.9%¹⁹. As development economics struggle to stack up, we expect rental growth to remain a feature of the sector. As a result, and partly thanks to higher income returns, well-balanced retail parks with grocery offerings and dominant shopping centres continue to outperform.

Retail investment volumes have slowed significantly over the first nine months of the year. At just £2.8 billion, this represents a 50% decline over the same period last year and comes from net selling by cross-border and institutional capital²⁰. Listed companies have been a recent positive force for the market, particularly Hammerson and Landsec, which are building scale through shopping centres. Landsec recently launched a £500 million equity raise in order to purchase Metrocentre in Gateshead.

Living

Performance is moderating in the living sector. According to the latest MSCI Monthly Index²¹, the living sector generated a total return of 3.5% over the 12 months to August, with capital growth of -2.5% over the same period. Outward yield movement in the purpose-built student accommodation (PBSA) and build-to-rent (BtR) sectors has been a key driver of this, largely due to margin erosion as a result of higher bond yields. We are more positive about the single-family sector, though, which has attracted significant institutional capital over recent years. 

Investment in the UK living sector reached £7.3 billion year to date in 2026, its highest level since 2022²². PBSA accounted for £2.2 billion of year-to-date investment, with Unite’s acquisition of Empiric at the start of the year representing almost half of this total. Following a relatively subdued start to the year, investment in the UK’s BtR sector gained momentum in the second and third quarters, although activity remained concentrated in a small number of large assets. Capital has increasingly targeted income-producing stock, rather than the funding of new developments. This marks a notable shift from previous years.

UK rental growth rose to 2.6% in the year to July, taking the average monthly rent to £1,340. Available rental stock is 3% lower than a year ago, while the flow of new homes has fallen by 6%, as landlord investment remains subdued²³. Competition has increased to 5.3 enquiries per listing, with the strongest rental growth concentrated in markets experiencing the sharpest supply reductions. In England, the rise in rents can also be attributed to the Renters’ Rights Act, which came into force in May. As landlords can no longer accept offers above the advertised rent, some have responded by resetting asking rents to better reflect prevailing market values.

We remain positive about the occupational fundamentals for the living sector in the UK, while noting that yields for BtR and PBSA are susceptible to further outward yield movement. Supply remains constrained, which is compounded by small-scale landlords leaving the market. Indeed, the size of England’s private-rented sector has fallen by 4.2%, equivalent to around 200,000 homes, since October 2022²⁴. In addition, the average cost of a five-year fixed-rate mortgage reached 6% for the first time in three years. This is expected to result in more subdued activity in the for-sale market and provide an additional layer of support for the rental market.  

Outlook for risk and performance

After starting the year well, the outlook for UK real estate has become increasingly dependent on external factors, such as the conflict in Iran and secondary effects. Due to increased inflation expectations and a semi-permanent state of conflict, rising bond yields are putting pressure on real estate pricing globally. With 10-year gilt yields firmly above 5%, we see the greatest risks to performance in areas of the market where tighter yields present a negative spread over gilts. Overall return expectations have been reduced over the near term, while medium-term returns remain primarily income driven.

We are particularly cautious about return expectations in segments where rental growth is also moderating, as the effect of outward yield movement and lower income growth compounds negatively. Therefore, we are less positive about BtR, PBSA, London and South East industrials, and regional office markets. We favour the higher-yielding retail sector, while other segments of the market are likely to reprice unevenly in the near term. Fundamentals for real estate still look positive, in large part owing to low new supply and resilient economic growth. We still favour core central London office markets, the rest of UK industrials, and single-family housing.