Economic growth: more investment, less consumption
UK economic activity softened in the second half of 2025, driven in part by disruption to industrial production. GDP growth during Q3 (+0.1%, q/q) was the weakest quarter in 2025, however the Q4 figure is expected to show stronger q/q growth at +0.3%, supported by a rebound in business activity. Overall, we expect the UK economy to have grown by 1.4% in 2025. In 2026, we expect economic growth to fall to 1.1%, as both international and domestic headwinds continue.
Labour market: softening
Unemployment reached 5.1% in October 2025, the highest since 2021, with surveys suggesting it could rise to 5.5% in 2026. Job vacancies are well below post-pandemic peaks, indicating weaker demand. Wage growth in the private sector slowed to 3.6% in November and is expected to ease further, helping to moderate inflation.
Inflation outlook: up, but trending down:
Inflation was 3.4% y/y in December 2025, but is forecast to fall to 2.3% by end-2026, closer to the Bank of England’s target. Services inflation is set to slow, especially after Q2, as the impact of earlier fiscal measures fades. Companies face weaker demand and greater competition, reducing their pricing power. This poses a downside risk to inflation.
Monetary Policy: data dependent
The Bank of England remains cautious with rate cuts due to slow progress on inflation. We anticipate at least one further cut of 25bps in the first quarter of 2026, perhaps coming at the March MPC meeting and reflecting a cautious approach in a context of still relatively high inflation. More pronounced disinflation could produce two further cuts over the second half of 2026 and first half of 2027, taking policy rate to 3.00% by June 2027.
Market resilience despite high uncertainty
Despite economic and geopolitical risks, UK commercial real estate investment proved steady in 2025. All‑property investment reached approximately £53bn, a modest 2% rise from 2024, thanks to the strongest Q4 since 2021. Central London office investment rose 29%, driven by larger deals and strong cross-border demand.
Prime yields largely held steady, but fell in some regional office markets, even as the 10-year Gilt yield stayed above 4.5%. Leasing fundamentals have continued to improve, with increased logistics and office take-up and lower vacancy rates fuelling persistently strong rental growth.
The denominator effect
Strong performance in equities and some commodities have left many investors underweight in private asset classes, increasing demand for real estate’s relatively stable income yields. Concerns over US exposure and stretched public market valuations are also driving institutional capital into more attractively priced international markets. This puts the UK market at an inherent advantage. The yield differential with Europe makes it an attractive market to global investors who may be able to borrow more cheaply, while its depth of liquidity surpasses its Continental peers
Prospects for 2026
Investment prospects for 2026 are positive, though some investors remain cautious about economic and geopolitical risks. Lower interest rate volatility and anticipated Bank Rate cuts could support real estate debt pricing, while lenders are tightening margins and more willing to fund acquisitions. Fundraising has also picked up, with Europe attracting a record share of global capital.
Investment volumes should therefore grind modestly higher in 2026, but the winners will be those anchored in cashflow growth and active management rather than reliance on market‑wide yield compression.
