The economic repercussions of the Middle East
conflict have intensified, with disruption to global
energy supplies driving higher inflation and borrowing costs.
Growth in the UK has been supported by technology-related services and AI investment, although the recovery remains narrowly based, with construction and other sectors struggling. Rising energy prices have reversed the recent improvement in inflation, prompting central banks to reconsider monetary tightening. The Bank of England faces increasing pressure to raise interest rates despite subdued labour demand and fragile consumer confidence. The Office for Budget Responsibility downgraded it’s forecast for UK GDP growth to 1% next year.
Global equity markets delivered a mixed performance in Q3, with US technology stocks outperforming amid continued enthusiasm for artificial intelligence, while Asian and European equities weakened under pressure from geopolitical uncertainty, elevated valuations and rising interest rates.
UK equities proved relatively resilient, supported by energy and commodity stocks. UK REIT share prices declined despite strong occupational markets and continued rental growth, reflecting concerns overfinancing costs and property valuations. Sovereign bond yields rose sharply across developed economies as investors reassessed inflation expectations and the outlook for monetary policy. UK gilt yields increased sharply, placing upward pressure on borrowing costs and property investment yields.
UK commercial property performance weakened further in Q3, with All Property total returns slowing as falling capital values offset continued rental growth, leaving income as the principal source of returns.
Retail outperformed, benefiting from attractive yields and improving occupational demand, while offices remained the weakest of the traditional sectors despite strong rental growth and robust valuations for prime Central London assets. Industrial performance moderated as rental growth slowed and investment yields softened. Investment transaction volumes declined further, remaining substantially below historical averages, while domestic lending conditions showed signs of tightening. Rising gilt yields and borrowing costs have increased pressure on valuations, reinforcing differences between sectors and asset quality.
Expectations for UK commercial property returns have weakened further, with the RE:UK consensus forecasts revised downwards and the range of expectations widening amid increasing economic uncertainty.
Cluttons has consequently reduced its forecast for 2026 All Property total returns to 4%–5%, anticipating further modest capital value declines as higher gilt yields and financing costs feed through into investment pricing. Nevertheless, resilient rental income and the absence of widespread forced selling should limit the risk of a severe correction. Looking ahead, easing geopolitical tensions, moderating inflation and improving monetary conditions could support a gradual recovery, lifting annualised total returns towards 7% over the next three years.
