UK real estate market outlook Q2 2026

UK economic outlook

Activity

The UK economy was weak at the start of the year, with the labour market softening and GDP growth close to flatlining at just 0.1% over the fourth quarter of 2025. After digesting the initial weeks of the conflict in the Middle East, the latest Purchasing Managers’ Index and consumer confidence surveys point to a deteriorating economic outlook. Growth will be negatively affected; the extent of which depends on any further conflict escalation and how that feeds into higher energy costs. 

Inflation

Inflation had been tracking towards the 2% target at the start of the year. But even in the less damaging ‘TACOil’ scenario¹, (see Figure 2), the latest energy price shock will send a material change through the economy, at least over the short term. Household energy bills will rise, particularly after the July price cap change, and there is a significant risk of stickier secondary effects, including higher food prices. Inflation could peak around 10% in the ‘stagflation’ scenario, the effects of which would permeate much of the economy.

Policy

The Bank of England has pivoted to a much more hawkish position. In a challenging trade-off, inflation is expected to surge and secondary effects could prove stickier than expected. Meanwhile, the labour market and wider economy are forecasted to weaken significantly, and policy remains elevated from the equilibrium rate. In the ‘stagflation’ scenario, the path for multiple rate hikes becomes clear, while it’s a more challenging call under the ‘conflict risk dominates’ scenario. As such, we would expect rates to be on hold throughout 2026, while the situation becomes clearer. 

Figure 2: UK economic forecasts 

Conflict risk dominates (base case – 13/04/2026)

TACOil

Stagflation

Sector-specific commentary can be found in the following sections. However, given the current uncertainty surrounding the conflict in the Middle East, it’s worth highlighting our thoughts on UK real estate in the context of our multiple scenarios

Conflict risk dominates (base case – 13/04/2026)

Occupational markets would likely remain bifurcated and best-in-class assets would outperform. Meanwhile, cost pressures may begin to limit occupier expansion, although constrained supply would maintain some support for rents. Transaction volumes may remain below long-term averages, and downward pressure on capital values would increase because of higher-for-longer rates.

TACOil

Inflation may still increase throughout 2026, but falls more decisively and is less sticky. Real estate yields may drift outwards but prove more stable as the gilt market prices in clarity. Rental growth may slow over the short term as cost pressures increase. Transactions may pick up gradually throughout 2026, creating increased competitive tension in the second half of the year.

Stagflation

Recessionary dynamics appear in this scenario and they are coupled with accelerating inflation. This is driven by energy and secondary-effect supply-side pressures. Capital values may slip as gilts remain volatile. Monetary policy would tighten despite weak growth, before easing as the economy softens. Occupier demand may weaken, with best-in-class assets faring best. Investors’ focus would shift decisively towards defensive, income-secure assets, but volumes would remain below long-term averages.

UK real estate market overview

Real estate returns have been softening over recent months. After peaking in the 12 months to August at 8.7%, total returns came in at 6.9% on an annual basis during February². Income returns remain strongest for the retail sector, pulled higher by a rebased shopping centre segment. Capital growth across All Property was largely driven by rental growth over 2025, but this trend seems to be slowing as cost pressures show up in various areas of the market.

Investment volumes over the first quarter of the year were the slowest since 2012, at just £8.3 billion, down over 30% below the long-term quarterly average³. Although the UK is generally considered a safe haven for international investors, current volatility will likely curtail any meaningful pick up in transaction activity until there is more clarity.

UK real estate market trends

Offices

The office sector is lagging the All Property Index, with total returns of just 2.8% over the 12 months to February. Obsolescent stock in out-of-favour segments of the market has accelerated capital value declines, with the rest of the South East market down 8.3% over the 12 months. The rest of UK offices are a similar story, down 3.8% over the same period. Unsurprisingly, the favoured central London submarkets are more resilient in this regard, benefiting from stronger occupational demand and tighter supply. In the Mid Town and West End submarkets, capital value growth is positively contributing to their outperformance. 

The office occupational market is defined by ongoing flight-to-quality and location preferences. West End prime rents grew 12.9% over 2025, as occupiers doubled down on core office markets⁴. The City of London is still experiencing robust prime rental growth at 5.1%, although this has roughly halved over recent quarters. In terms of supply, challenging viability is curtailing new development across the office sector, which should maintain rental pressure in the prime segment of the market. As the conflict in the Middle East persists and higher inflation feeds through, we would expect build-cost inflation to be meaningfully affected. As such, we have more conviction in central London prime rental growth over the medium term, particularly in the West End.

There is a risk that the conflict in the Middle East will affect occupational demand over the short term, particularly if the effects begin to look more recessionary. Despite this, we maintain a favourable outlook for high-quality central London offices close to transport links, given tight supply and strengthening sentiment. In this scenario, upward pressure on prime yields looks unavoidable, but given the supportive dynamics, we would expect any pricing correction to be relatively short-lived. Regional offices are a different story, as business closures and cost-cutting would likely affect regional markets more. Occupier demand is not as deep and investor demand is weaker, meaning the potential for outward yield movement and greater voids is significantly higher. Consequently, our outlook for regional offices has deteriorated ahead of potential volatility. 

Industrial and logistics

Performance in the UK industrial sector remains positive, with a total return of 7.8% for the 12 months to February 2026⁵. However, there is a noticeable spread in returns emerging between the South East and the regional industrial markets, with returns of 6.9% and 10.6%, respectively, over the latest 12-month period. The differential in returns can largely be attributed to a higher income return, which is particularly pertinent in the current environment where income is the key component of returns.

At 5.8%⁶, the national vacancy rate remains stubbornly high, with the market recalibrating towards an environment where supply and demand become more balanced. An observable trend across the industrial and logistics sector is a more favourable supply outlook. Speculative development and construction starts have slowed materially from their peak in 2022, as a combination of build-cost inflation and macro uncertainty places a natural cap on development activity. This will provide support for rental growth over the medium-to-long term.

In London, the vacancy rate for logistics space is higher than the national average, as rental affordability’s negative net absorption weighs on the market. London’s vacancy rate has risen to 7.3%, up from the lows of 2% reached during the pandemic⁶. As with the regional industrial markets, there are areas of the capital that are bucking the trend. While some eastern areas of London struggle with higher vacancy rates amid subdued demand and rising completions, areas in western London, like Heathrow, are benefiting from vacancy rates that sit comfortably below the market average. This demonstrates the importance of understanding the micro drivers within any given market. 

Investment levels reached £13.1 billion in 2025⁷, the highest annual investment total since 2022, with cross-border capital accounting for close to 50% of buyer activity. The sector has faced a much quieter start to the year, which is in line with UK real estate investment activity. The fluidity of the situation in the Middle East is creating greater uncertainty. Although there is a range of possible outcomes at this stage, it’s likely that investment activity will be curtailed until more clarity on the situation becomes available. There are also issues from an occupational perspective that need to be taken into consideration, as increased inflation and fuel costs place a greater burden on consumers and businesses. 

Retail

After slow improvements over the course of 2025, consumer confidence took a hit in March – falling to -21⁸, the lowest reading since April last year. This doesn’t consider the most recent developments in the Middle East. As a result, we would expect negative sentiment to accelerate, especially as inflation feeds through. The labour market was cooling prior to the conflict, so we are certainly heading towards a period of negative real wage growth. In general, firms will have minimal pricing power to pass costs onto consumers. This will affect discretionary spending and should exacerbate existing trends that benefit discount retailers and grocers. 

Performance in the retail sector is being driven by the strength of income returns, but these are still polarised by quality. Top-quality shopping centres are attracting strong tenant demand, while secondary locations are struggling with elevated vacancy rates. The supply constrained retail park segment posted five-year rental growth of 4.7% per annum⁹. Although occupier demand is strong, a combination of increased business rates, National Insurance Contributions, and the National Living Wage will certainly weigh on occupiers’ levels of affordability. When paired with increasing energy costs and higher inflation, we expect to see softer rental growth. The extent of this softness will depend on the severity of inflationary pressures. In worst-case scenarios, we could see outward yield movement for more keenly priced assets. 

Investment volumes were robust during 2025, just 5% off the long-term annual average at £8.3 billion¹⁰. Of this total, cross-border capital remains the most active and real estate investment trusts acquired at pace – particularly Realty Income and Hammerson buying retail warehouses and shopping centres, respectively. Institutions, while still net sellers, sold far less and saw their strongest net acquisition total since 2018 at -£0.96 billion.

Living

The residential sector performed well over the 12 months to February, returning 7.3%, modestly outperforming the wider real estate sector. In the private-rented sector, the supply/demand imbalance remains structurally supportive, but the sector is moving further towards a point of equilibrium. Rents are still rising for a number of cities across the UK, but the pace of growth has moderated, given the narrowing spread between demand and supply. Rents have risen 1.9% for new lets in the UK over the last 12 months to March 2026, down from 2.8% a year ago¹¹. There is a large variation in rents across the UK, though, with more affordable markets recording stronger rental growth. Markets like Liverpool, Newcastle and Glasgow, where rents are lower, have seen rents grow by 4.6% to 3.7%. 

While rents have moderated over the last 12 months, the conflict in the Middle East has resulted in the market reassessing the path for interest rates, given the inflation risks generated from higher energy and food prices. As a result, mortgage rates in the UK have increased substantially. The rate on the UK five-year, fixed-rate mortgage increased from 4.89% in March to 5.63% at the beginning of April, according to Uswitch data. This will likely curtail activity in the for-sale market, with the rental market likely to be a net beneficiary. This, combined with fewer homes for rent (the number of homes to rent in the UK remains 23% below pre-pandemic levels), should maintain rental tension for the sector¹².

The backdrop for the UK’s build-to-rent sector remains supportive, but a lack of development or forward-funding deals makes it more challenging for institutions to access the market. Development viability is very challenging at present, driven by rising build costs, higher interest rates and policy uncertainty. This is clearly illustrated by the drop in the number of units under construction in the UK, which is down 15% nationally¹³. London is leading the slowdown, with units under construction down 32% in the capital. Despite the fundamentals remaining supportive, access to stock is the primary challenge.

The outlook for the purpose-built student accommodation (PBSA) market is more challenging. A combination of affordability constraints, weaker leasing dynamics, increasing incentives and more unpredictable international student demand is weighing on occupancy. Sentiment towards the sector has weakened. According to CBRE, yields for direct-let PBSA in central London and prime regional cities have moved out 40 basis points (bps) and 50bps, respectively, since November 2025. 

Outlook for risk and performance

We expect a challenging outlook for UK real estate over the year, given geopolitical risk and potential macroeconomic volatility. The conflict in the Middle East is affecting our outlook significantly. Prior to February, this looked fairly similar to recent years at an All Property level. Instead, we expect yields to shift outwards slightly over 2026, before recovering over the following two years. We also expect rental growth because of a combination of affordability concerns and cost pressures. This is most pronounced in sub-segments with existing structural headwinds, such as PBSA, but the wider residential market will also be affected if inflation returns strongly. It’s also worth noting that changes in business rates will have a significant impact on occupational costs in hospitality, logistics, and parts of the retail sector.

Across a three- and five-year timeframe, we expect UK real estate to perform just below its long-term average at a market level. Prime, or best-in-class assets will continue their trend of outperforming the market across sectors, and prohibitive development economics will only serve to underpin rental growth over the medium term. In particular, we like segments such as West End offices, supermarkets, dominant retail parks, and select regional industrials as income-security and defensive plays become more important.