Geopolitical risks remain elevated, but their economic impact has been less severe than feared, despite the collapse of the June Middle East peace agreement and renewed hostilities.
Artificial intelligence continues to underpin the medium-term economic outlook and the IMF expects AI-driven investment and productivity gains to offset much of the drag from geopolitical tensions. The UK economy has remained resilient, and the Bank of England sees little evidence of a significant deterioration in growth. In a similar vein, UK inflation has for the moment confounded fears of a spike driven by rising fuel prices.
Global equity markets delivered a strong recovery in Q2.
Despite continued geopolitical uncertainty, easing oil prices and falling inflation concerns supported risk assets, with semiconductor and AI infrastructure companies outperforming and offsetting weaker performance from traditional sectors such as energy. UK commercial real estate fundamentals remain stronger than public market valuations imply. Occupier demand for prime offices, retail and logistics assets is still robust. Bond yields remain elevated and may place further upward pressure on property yields but the consensus view that there is little likelihood of a change to Bank Rate in 2026. There are, however, expectations of at least one 25 bp cut in 2027. Some houses are more bullish and expect Bank Rate to reach 3.00% or lower by the end of 2027.
The UK commercial property market faces a challenging backdrop.
Higher financing costs, geopolitical uncertainty and elevated gilt yields continue to suppress transaction activity and capital values, but positive returns are being sustained by robust income returns and rental growth rather than capital appreciation. Investment capital is available but remains highly selective in its deployment. Investment transaction volumes remain below long-term averages and refinancing dominates new lending, although liquidity continues to improve and portfolio transactions and corporate M&A are providing an increasingly important source of market activity.
Expectations for UK commercial property returns have been downgraded but remain positive.
Consensus forecasts have been revised lower in response to geopolitical uncertainty, higher bond yields and a slower path for interest rate cuts, with the House View now forecasting All Property total returns of around 5% in 2026, compared with 9% at the start ofthe year. Income and rental growth should continue to underpin returns despite limited capital growth. Investors appear to be delaying acquisitions until macroeconomic uncertainty eases, but stable property yields and the Bank of England’s willingness to look through temporary energy-driven inflation suggest a repeat of the sharp valuation correction seen in 2022 is unlikely. We expect returns to climb to an annualised 7% over the next three years.
