UK real estate market Q2 2026 transactions reach £7.7b; 40% below Q2 2025, signaling broader, slower market

UK real estate market commentary - July 2026

Despite heightened geopolitical uncertainty and elevated financing costs, repriced valuations and resilient occupier markets continue to create compelling long-term opportunities in UK real estate.

The Middle East conflict continues to weigh on the UK macroeconomic outlook, primarily through its effect on energy prices, inflation expectations, and economic confidence. Although the initial ceasefire raised hopes that disruption would prove short-lived, renewed attacks on commercial shipping through the Strait of Hormuz and subsequent US military retaliation have highlighted the fragility of the situation.

While oil and gas prices have eased from recent peaks, geopolitical risks remain elevated and continue to represent a material source of uncertainty for both the global economy and UK financial markets.

Despite these headwinds, the UK economy has proved more resilient than forecasters had anticipated. GDP expanded by 0.3% month-on-month in March, the first full month following the outbreak of the conflict, contributing to a stronger-than-expected 0.6% quarter-on-quarter expansion in the first quarter of 2026. Activity subsequently softened in April, reflecting weaker domestic demand and the drag from elevated uncertainty.

Even so, the stronger first-quarter performance prompted Consensus Economics to revise its 2026 UK GDP growth forecast upwards to 0.9% in June and July, from 0.6% in April.

Businesses and households are proving resilient against repeated geopolitical and economic shocks, however this should not be mistaken for underlying strength. The UK entered the current conflict with several structural challenges, none of which have dissipated, and some of which have intensified.

Headline inflation has eased modestly, with CPI declining from 3.0% in March to 2.8% in both April and May, but underlying inflation remains elevated, particularly across core and services components. Meanwhile, the labour market continues to soften, public finances remain stretched, the tax burden is historically high, and productivity growth remains weak.

Against this backdrop, the Bank of England has left the Bank Rate unchanged since the start of the year. The renewed rise in energy prices led policymakers to pause what had previously been expected to be a gradual easing cycle, reflecting concerns that higher energy costs could generate more persistent inflationary pressures.

At its June meeting, the Monetary Policy Committee maintained an explicitly data-dependent stance, with only two members voting for an immediate increase in Bank Rate. Financial markets continue to assign a meaningful probability to further policy tightening later this year, should inflation remain stubbornly high.

Heightened geopolitical tensions, persistent inflation and increased domestic political uncertainty temporarily pushed UK government bond yields to their highest levels since 2008, with swap rates also moving sharply higher. By early July, 10-year gilt yields remained elevated at 4.8–5.0%.

Political uncertainty also increased following the resignation of Sir Keir Starmer as Labour leader. Financial markets have so far reacted calmly to the leadership transition. Nevertheless, the new administration inherits the same economic challenges, including weak productivity growth, constrained public finances and persistent inflationary pressures.

Fiscal policy is therefore likely to remain under scrutiny, with any perceived relaxation of fiscal discipline carrying risks for gilt yields, sterling, and broader investor confidence.

In UK real estate, the nascent recovery has paused as geopolitical uncertainty, elevated financing costs, and domestic political developments have weighed on investor confidence and transaction activity.

After modest gains earlier in the year, capital value growth measured by the UK MSCI Monthly Index weakened during March, April, and May. The latest MSCI UK Monthly Index shows all-property capital values up by just 0.5% over the twelve months to May, with performance continuing to diverge across sectors.

Retail and industrial recorded annual capital growth of 1.5% and 1.7% respectively, while offices remained the principal drag on performance, with capital values declining by 2.8% over the same period. Although the broad-based recovery has paused, sector dispersion continues to create opportunities for active investors.

Investment activity remains subdued. Preliminary MSCI RCA data indicates that approximately £7.7 billion of UK real estate transactions completed during Q2 2026, around 25% below Q1 volumes, almost 40% lower than Q2 2025, and approximately 40% below the ten-year seasonal average.

This represents the weakest quarterly investment market since Q3 2023 and reflects caution among both buyers and sellers as they assess geopolitical developments, financing conditions, and pricing expectations.

Nevertheless, history suggests that periods of reduced liquidity can create attractive opportunities for investors with patient capital and the ability to transact selectively.

Despite the slower recovery, current market conditions continue to offer an attractive deployment window for long-term investors. Following the substantial 25% average correction in capital values between mid-2022 and mid-2024, on an inflation-adjusted basis UK real estate is now trading close to its lowest real valuation levels for more than two decades.

Historically, lower ‘real’ entry prices have provided a favourable starting point for long-term investment performance, particularly when accompanied by resilient and growing income streams. Consistent with this view, our updated MSCI UK forecasts anticipate total returns of approximately 4% in 2026, improving to approximately 8% in 2027, with average annual returns of approximately 7% over the 2026-2030 period.

Occupier fundamentals also remain supportive across multiple sectors. Development activity continues to be constrained by elevated construction costs, higher development finance rates, and tighter lending conditions, limiting the supply of new high-quality space. Should UK economic growth regain momentum, these supply constraints are likely to support rental growth across well-positioned assets in structurally supported sectors.

More broadly, constrained development pipelines, rising replacement costs and rebased capital values are creating an increasingly favourable backdrop for long-term income growth.

Asset selection therefore remains critical. Following significant repricing across all major sectors, future performance is increasingly likely to be determined by both asset-specific characteristics and broader market movements. Location, sustainability credentials, operational flexibility, and the ability to meet evolving occupier requirements are becoming increasingly important drivers of relative performance.

Investors should also remain mindful of the evolving regulatory landscape. Recent and proposed reforms covering commercial leasing practices, business rates, building safety, minimum energy performance standards, and residential regulation are likely to have varying impacts across sectors and reinforce the importance of careful underwriting.

Institutional investors are also increasingly adopting a Total Portfolio Approach (TPA), which reframes individual asset classes as functional components within broader multi-asset portfolios rather than standalone strategic allocations.

Under this framework, capital is allocated according to its contribution to overall portfolio objectives—including return generation, inflation protection, income resilience, diversification, and liquidity—rather than to satisfy fixed allocation targets.

Although TPA is in its early stages for UK real estate, the sector is well suited to this approach where, instead of evaluating real estate against a fixed MSCI index, investors evaluate how physical properties, REITs, and other real assets contribute to the fund’s holistic liabilities and total return targets

For now, our preferred portfolio positioning remains broadly unchanged. We continue to favour sectors supported by long-term structural and needs-based demand, alongside opportunities for active asset management and operational value creation.

Industrials and logistics: demand continues to outpace supply

We continue to see value in industrial estates, including outdoor storage, cross-dock warehouses, and urban distribution assets, supported by structural tailwinds such as e-commerce, urbanisation, and supply chain reconfiguration.

Demand for modern, sustainable space continues to outpace supply as occupiers seek greater operational resilience, while landlords benefit from opportunities to monetise access to secure and renewable power. At the same time, rapid growth in AI is sustaining strong demand for data centres and powered land.

The retail sector has stabilised following a prolonged period of adjustment, with improving valuations and attractive income returns on rebased rents. While pressure on consumer spending warrants continued caution, our approach remains highly selective, with a preference for retail parks and convenience-led formats, including supermarkets in strong and growing catchments.

Offices: quality continues to command a premium

In the office sector we remain selective, favouring well-located, high-quality buildings with strong sustainability credentials in Central London, major regional cities, and knowledge-based economies.

Moe broadly, hybrid working has established a new equilibrium, but occupiers continue to prioritise best-in-class space to attract and retain talent. With development constrained, the shortage of prime office space is likely to become more pronounced, supporting rental prospects for the highest-quality assets. The implications of AI for future office demand remain uncertain and will require close monitoring.

Needs-based sectors remain well positioned: Self-storage and ‘living sectors’

We also continue to favour sectors where operational improvement can unlock income growth and inflation protection through stronger pass-through mechanisms. Self-storage remains attractive given its resilient fundamentals and consolidation opportunities, while living and social infrastructure 1 assets, including medical centres, benefit from durable demographic demand and defensive long-term cash flows.

Finally, we continue to see a significant opportunity for private capital to support the delivery of affordable and social housing 2 , offering contractual or indirectly, inflation-linked income alongside positive social impact contributions. Structural affordability pressures and a chronic shortage of housing continue to underpin demand, while the sector benefits from strong long-term policy support.

1 In this context only, we are defining social infrastructure as healthcare, employment opportunities, education and training.

2 As defined in Annex 2 of the National Planning Policy Framework or any subsequent regulatory definitions, as well as specialist housing, sheltered housing, and other forms of housing for residents facing homelessness or other crisis situations, whether regulated or otherwise.

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