Economic outlook: taking a breather

Economic activity was stronger than anticipated in 2025. Activity is expected to slow slightly in 2026, but despite the downside risks in the labour market, difficulties in industry, and heightened global tensions, quarterly growth is expected to return to a higher and more stable pace in 2026 thanks to monetary easing. Increased defence spending in the UK and Europe will also support GDP growth. 

Inflation outlook: potential to go higher

Headline and core inflation rates are easing, but remain uncomfortably high. We anticipate that inflation will continue to decline towards the target. However, if the conflict in the Middle East persists at its current intensity, and energy and shipping costs remain significantly elevated, this could delay the fall back in inflation until the end of H2 2026. 

Monetary policy: cautious approach

Considering recent events, we think the MPC will be increasingly cautious, even if their current posture is to cut. We continue to expect one 25bps cut in 2026, but the timing may shift away from the March meeting. Beyond that, any further cuts will depend on how long the conflict and energy price increases last.

Public finances: raised headroom

At the recent Spring Statement, the Chancellor did not announce any new policies, and the accompanying forecast by the Office for Budget Responsibility (OBR)’s made few major changes. What was noteworthy was the forecasted improvement in borrowing requirements over the next five years. Notwithstanding the potential impacts of events in the Middle East, this allows the government to carry out its spending programmes in an improved fiscal environment.

UK economic data supportive of further price discovery

Recent UK economic data has been increasingly supportive of real estate price discovery. Inflation has continued to fall, reinforcing expectations of further rate cuts. Public finances data also improved, and by late February, the 10-year gilt yield had fallen to its lowest level since December 2024. Several large prime office assets across London and regional cities are currently for sale or under offer and expected to provide further insight into investor appetite and benchmark pricing. 

…but the litany of macro risks emphasise caution

Yet despite this, a host of risks continue to weigh on investor sentiment. For offices in particular, the exponential rise in artificial intelligence (AI) adoption is causing some understandable concern about the potential for reduced space needs. However, AI also has the potential to drive significant productivity gains, which could support business profitability and rental affordability. 

Political uncertainty also remains a key constraint. The recent by-election result and the upcoming local elections mean markets remain wary of any potential deviation from fiscal rules, and a risk premium - rooted in the 2022 mini-Budget - persists in UK borrowing costs. 

Escalating geopolitical instability has added further complexity in the last week. Humanitarian concerns are paramount, but a key concern for investors is whether this energy shock evolves into a sustained inflationary impulse. While some argue that a prolonged shock could eventually bring down long-end risk-free rates if growth expectations weaken, the Bank of England would likely be forced to act to tackle rising inflation. For real estate markets, this introduces renewed uncertainty just as pricing visibility was improving.

From cyclical to structural

One silver lining amid these challenges is that certain real estate sectors are increasingly bolstered by structural drivers that go beyond the economic cycle. The current backdrop has reinforced the strategic importance of resilient infrastructure and national security, each of which carries real estate implications.[1] 

Rather than a cyclical play on consumption and trade, certain real estate sectors can increasingly be seen as a conduit for national resilience and long-term policy priorities. This supports the case for continued institutional investment, but pricing discipline remains essential.