Economic Resilience Ahead Of The Autumn Budget
Speculation is mounting around the Autumn Budget, but recent data suggests the UK economy is showing more resilience than many anticipated. Consumer confidence, retail sales, and private sector output all surprised to the upside in September and October, with retail sales volumes reaching a three-year high. While some firms are deferring decisions until after the Budget, the overall impact of pre-budget uncertainty appears smaller than headlines suggest. Nevertheless, the economic outlook remains challenging, with business investment and hiring intentions subdued. Moderate growth is expected in the coming quarters, set against a backdrop of a weakening labour market and expectations of tighter fiscal policy.
Diverging Employment Trends Between Sectors
Labour market conditions softened in Q3, with job vacancies trending lower and unemployment edging higher - particularly in private sector industries exposed to higher labour costs, such as accommodation and food services. Public sector employment, by contrast, has held up, supported by increased government spending. This divergence is reflected in pay growth: public sector pay accelerated to 6% year-on-year in August, while private sector pay slowed to 4.4%. For the Bank of England, the slowdown in private sector pay is a reassuring sign that underlying inflation pressures are easing, even as public sector pay continues to rise.
Inflation (Mostly) Downhill From Here
Headline inflation surprised to the downside in September, holding at 3.8% year-on-year—below both consensus and Bank of England forecasts. The broad-based easing in price pressures, especially in food and energy, suggests inflation has peaked. Looking ahead, inflation is expected to fall to around 2.5% by April 2026, as energy and food prices continue to moderate and labour market cooling feeds through to weaker wage and price pressures. Against this backdrop, the Bank of England is anticipated to lower interest rates in December, with a further cut likely in early 2026.
Mixed Picture For The Investment Market
The UK commercial real estate investment market delivered a typically muted Q3, with total investment volumes reaching £10.4bn—down 14% on the five-year average but 2% higher than Q3 2024. Year-to-date, investment is 10% lower than last year, reflecting ongoing caution among investors. However, competition remains strong for reversionary and value-add opportunities in markets with constrained supply and robust leasing demand. Central London office investment is up 15% year-on-year, and industrial sector volumes are up 13%, with cross-border investment into logistics up 27%. Traditional commercial sectors are up 4% year-on-year, while residential and hotels are down 34% as the hotels market retrenches after a strong 2024.
Interest Rates Finally Moving In The Right Direction?
The 5-year swap rate has fallen to around 3.6%, and the 10-year gilt yield has dropped to 4.4%, both reaching their lowest levels of 2025. These declines are helping to reduce debt costs for borrowers and are providing much-needed breathing space for real estate yields and valuations. Lower discount rates are also reducing return hurdles, particularly benefiting core, long-income assets. Alongside narrowing loan margins, these shifts are acting as a tailwind for risk sentiment and market liquidity. While it may be too soon for these improvements to be fully reflected in private market data, early indications from the REITs market—a forward indicator of capital growth—suggest that investor confidence is starting to recover.
Momentous Autumn Budget Ahead
The Autumn Budget will be pivotal for risk sentiment and the cost of capital. The Chancellor’s expected tax rises could dampen demand and reduce inflation, increasing the likelihood of further rate cuts—potentially supporting real estate pricing and liquidity. Should the Chancellor deliver credible fiscal measures, bond yields could fall further, improving financing conditions for the sector. Stabilising yields, growing international investor demand, and improving financing conditions are positioning UK commercial real estate for a more optimistic finish to 2025.
