The UK economy is currently operating below potential, with stalled employment growth and cautious spending and investment from households and businesses.
However, the outlook has improved, with strengthening PMI data. The annualised growth forecast has been revised up to 1.8% per annum over the next three years. Inflation is expected to return to the 2% target by the end of 2026, driven by declining energy and food prices and slower wage growth.
World financial markets remained positive in Q4, with the MSCI World Index rising by 4.1% in both USD and hedged GBP terms.
However, concerns exist about the stretched valuations of AI stocks and the impact of President Trump’s policies. UK gilts yields fell across all maturities in Q4, but the yield on 10-year Gilts remains at its highest level since the banking crisis of November 2008.
The UK commercial real estate market slowed in Q4, with MSCI Monthly Index total returns decreasing by 36 basis points to 1.42% quarter-on-quarter and 7.1% for the 12 months to 31st December 2025.
Capital growth was limited in 2025. All Property equivalent yields have hardened by 10 bps in the 12 months to December but have made a negligible contribution to any change in valuations over the course of the last year. Meanwhile, market rental value growth remained resilient, particularly in the office and industrial sectors. Total returns remain largely driven by the income component.
The Investment Property Forum (IPF) lowered its 2026 projection for total returns to 8.3%.
Forecasts for market segments show continuing support for Shopping Centres, Retail Warehouses, and West End Offices. Whilst we expect All Property market rental value growth to slow from its current annual rate of 3.4%, it will remain above the 2.0% post GFC annualised average.
The outlook for yields will also improve should risk-free rates ease and UK real estate benefit from foreign direct investment originating in Europe and further afield. We now expect All Property total returns to reach 9.0% in 2026, and to average 8.0% annually through to 2028, though these forecasts are subject to risks stemming from ongoing global geopolitical instability.
