In this month’s briefing, we examine the UK economy’s sometimes-conflicting growth, labour market and inflation trends, and why this makes the task facing the Bank of England’s rate-setters especially difficult.
We also assess how renewed macroeconomic volatility has affected real estate investment activity and pricing, while highlighting the pockets of strength that continue to support office market liquidity.
ECONOMY
GDP Growth - remains resilient
UK economic activity has proved more resilient than expected, despite weaker labour market conditions and heightened global uncertainty. GDP growth remained strong in Q1, and 3m/3m growth to May was estimated at 0.7%. While momentum is likely to slow in the coming months, we expect 2026 growth to come in only slightly below 2025’s 1.3% expansion. The outlook remains fragile, with global volatility, higher energy prices and a lack of clarity over fiscal policy continuing to tilt risks to the downside.
Labour Market - still fragile, still stable
The UK labour market remains weak, but stable. Hiring has fallen significantly, yet the unemployment rate held at 4.9% in June. Wage growth is easing, particularly in the private sector, where regular pay growth slowed to 2.9% year-on-year. This reduces the risk of a wage-price spiral, but strong bonus payments and higher energy costs mean inflation pressures have not disappeared. For the Bank of England, wage data remains a key signal in deciding whether policy can remain on hold or may need to tighten again.
Inflation - downside surprise
UK inflation surprised to the downside for a third consecutive month in June, with headline CPI falling to 2.6%, below consensus expectations. Lower fuel and food prices helped ease pressure, while core inflation continued to moderate. However, the outlook remains uncertain. A higher energy price cap, rising input costs and construction cost inflation could lift headline inflation later in 2026 to c. 4%.
Monetary Policy: hawkish bias remains
The Bank of England has held rates steady, but its latest vote split points (6-3 for a hold) to a more hawkish stance. While domestic inflation data has softened, volatility in global energy markets and potential second-round effects remain a concern. The Monetary Policy Committee is likely to remain cautious, particularly as inflation is expected to edge higher in the second half of the year. We expect the Bank to keep a tightening bias for now, with the possibility of a further rate rise if inflation expectations or wage dynamics accelerate.
REAL ESTATE
Q2 data confirms hit to liquidity
Renewed macroeconomic volatility has slowed the UK investment market recovery. UK real estate investment volumes fell 28% year-on-year to around £9.3 billion in Q2, leaving H12026 turnover 14% below last year and 27% below the ten-year average. International investment also fell, reducing overseas buyers’ share to its lowest first-half level since 2011. More positively, office investment rose 4% year-on-year in H1, supported by stronger deal flow in Central London as well as the Big 6 regional cities.
Prime pricing resilient, for now
Prime pricing has remained broadly resilient, supported by limited forced selling and sustained demand for high-quality assets with secure income or credible rental growth. However, elevated bond yields continue to put pressure on real estate pricing. The 10-year gilt yield averaged 4.95% in Q2 and, after a brief dip in late June, has since moved back towards 5%, compressing risk premiums and widening bid-ask spreads. If risk-free rates remain around current levels, some further upward adjustment in property yields may be difficult to avoid.
CRE lending markets point to tough H2
Commercial real estate lending conditions have weakened materially. Bank of England data shows lending to the sector slowed sharply in Q2, reaching its lowest quarterly level in two years. Although competition remains strong for prime assets, higher swap rates are raising all-in debt costs. This is likely to constrain refinancing, development activity and larger transactions through the second half of the year.
Leasing markets continue to strengthen
Occupier markets remain a key support for real estate pricing. Office net absorption is positive, supply is tightening and prime rents continue to grow above inflation. Demand from the Media & Technology sector is particularly strong, with AI-related firms expanding their London footprints rapidly. More broadly, private-sector lending growth figures point to continued business investment and a healthier leasing backdrop. Strong income fundamentals should continue to support values, particularly for assets where rental growth and reversionary potential are visible and deliverable.
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