The downside risks to the outlook for the UK are dominant.
The uncertainty surrounding trade policy has been heightened by an extension to the original 90-day reprieve on global Tariffs implemented by US Presidential Trump that will now expire on 1st August. Longer-term solutions are also required on other global events, mainly to end conflicts in the Middle East and Ukraine, primarily from a humanitarian point of view, but also to address energy supply security. World leaders also have to consider how to work together to reduce the frequency of extreme climate events.
Financial markets around the world are once again pushing higher. The FTSE REIT index outperformed the wider all share market by 4.7 percentage points in Q2, suggesting that investors in public real estate markets finally expect the performance of the underlying direct real estate market to improve. Direct real estate investors, however, remain uncertain about pricing levels as All Property investment volumes decreased by -48% in the first quarter of 2025 compared with Q4 2024.
In Q2, the commercial real estate market continued its gradual slowdown. All Property UK total returns, as recorded by the MSCI Monthly Index, slipped by 27 bps to 1.7% from 2.0% in Q1. On an annual basis, total returns were broadly similar, at 8.6% to the end of June, compared to 8.5% in the 12 months to the end of March.
A likely further 75 basis points reduction in the UK Base Rate by the end of Q1 next year will reduce borrowing costs for real estate investors. But the steepening of the yield curve and increase in longer-dated yields is likely to be supported by quantitative tightening. Higher risk-free rates will put a collar on the scope for any re-rating of property yields. This quarter we have again downgraded our 2025 All Property total return forecast to 7.0% but have maintained our projection of 8.0% on a three year annualised basis reflecting our expectation for improved performance through 2026 and 2027.
