In this month’s briefing, we examine how strengthening investment in AI, infrastructure and advanced manufacturing are supporting UK growth, while increasing signs of energy cost pass-through complicate the inflation outlook and strengthen the case for a near-term interest-rate rise.
In real estate markets, these structural growth themes are increasingly driving demand for industrial space, but elevated gilt yields continue to test pricing assumptions as well as development viability. We also consider whether bond yields may be approaching their peak and why clear communication of a fiscally credible Autumn Budget will be key to providing firmer ground for investors and developers.
ECONOMY
Manufacturing strength becoming harder to ignore
The UK economy continues to outperform expectations. Over H1 2026, the UK grew at an annualised rate of 2.4%, comfortably above average, and comparing favourably with US and German growth of 1.8% and 1.6% respectively. Growth is becoming increasingly concentrated in long-term investment themes rather than consumer demand. AI and infrastructure has been a key support to manufacturing activity, consistent with a broader global trend, while consumer-facing indicators also remain encouraging.
Inflation: growing signs of cost pass-through
There are increasing signs that the energy price shock is moving into the wider economy. Utilities and fuel prices remain the main driver of headline inflation, which rose to 3.1% - a five-month high – in August, but business surveys and producer price data continue to show rising wholesale costs and a growing willingness among some firms to pass these increases through to customers.
Bank of England: patience wearing thin
Amidst these growing price pressures, September's MPC meeting delivered no change in Bank Rate, but the tone of communication was noticeably more hawkish. The Bank of England increasingly looks willing to act to prevent a wage-price feedback loop from emerging, but it remains unconvinced that a prolonged tightening cycle will be required.
REAL ESTATE
Manufacturing strength: a structural industrial tailwind
The improvement in manufacturing activity is translating into greater capacity needs. Granted, the recovery remains uneven, with energy costs and grid capacity significant constraints. Nevertheless, rising output across strategic industrial segments, alongside continued strength in retail sales, are rebuilding demand for production and distribution space.
Is property pricing “in hock” to bond markets?
Nonetheless, the interest rates outlook remains top of mind for real estate investors. A mix of resilient global growth, inflation and fiscal concerns and huge AI-related bond supply is keeping the 10-year gilt yield at a 20-year high. In turn, real estate pricing assumptions are being tested. Fiscal uncertainty and the vulnerability of the economy to a prolonged energy shock justify greater caution, in our view.
Autumn Budget: communication is key
In this challenging market, the upcoming Autumn Budget’s most important impact may be what it does to borrowing costs, rather than any new policy initiative. With bond yields precariously high, poor communication or an inflationary, undeliverable package could intensify upward yield pressures. However, a fiscally-responsible Budget that shows unwavering commitment to fiscal rules could help reduce some of the risk premia embedded in long-term interest rates and give investors and developers firmer ground on which to plan.
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