UK real estate market commentary: October 2025
While economic and fiscal challenges remain, the UK real estate market is being supported by limited supply and our forecasts suggest a nascent recovery could gather momentum in 2026.
Autheurs
Economic backdrop
US-UK trade pact alleviated some concerns, but downside risks remain
The UK economy faces a range of economic, fiscal and political uncertainties that continue to hinder growth prospects and remain a source of downside risk to future growth. However, the conclusion in May of a US-UK trade agreement, which was a pertinent consideration for markets, has alleviated some concerns to a degree, although tariffs in specific sectors remain subject to ongoing negotiation.
After a strong start to the year where the UK economy expanded by 0.7% quarter-on-quarter in Q1, momentum slowed in Q2 to 0.3%. Despite this, the consensus forecast for 2025 GDP growth has been upgraded to 1.2% from 0.7% in March this year.
Fiscal policy in focus; inflation concerns could limit monetary policy support
Fiscal policy remains a key area of focus. The June Spending Review highlighted the challenging trade-offs facing policymakers, given limited fiscal headroom and elevated borrowing costs. Recent weeks have seen continued upward pressure on gilt yields, a reflection of both domestic fiscal pressures and increasing concerns about the sustainability of government debt. Of note was the 30-year gilt yield peaking at 5.75% in early September, the highest level seen since 1998.
The upcoming November budget could introduce spending cuts, but more likely (substantial) tax increases that could in turn increase inflationary pressures and impact both household incomes and corporate margins. Indeed, inflation remains a persistent concern with annual consumer price inflation exceeding 3.0% since April, reaching 3.8% in July, August and September, the highest readings since January 2024.
As a result monetary policy is expected to be less supportive, with limited room for further interest rate cuts in the near-term. The Bank of England has already paused its rate cutting cycle, with members voting to maintain the bank rate at 4.0% in September. Markets are not expecting any further cuts until February/March of next year, with rates likely to remain around 3.75-4.0% throughout 2026.
UK real estate market
Demand subdued, but supply constraints supporting rents
On the occupier side, ongoing uncertainties are expected to continue to dampen business confidence and curb corporate decision-making, resulting in subdued near-term occupier demand. Nevertheless, new supply remains broadly constrained owing to a scarcity of modern Grade A space, persistently high construction costs and capacity constraints in the construction sector. This supply-demand imbalance is expected to underpin rental values and provide support for future rental growth.
Recovery slower than anticipated, but market positioned for momentum to pick up in 2026
Turning to capital markets, preliminary data from MSCI RCA indicates that transaction volumes for the third quarter reached just over £7 billion. Whilst this figure may be revised upwards, it is nearly 50% below the average Q3 volume of the last 10 years. Sentiment indicators point to improved investment activity in 2026. By way of example, PMA’s index of investor intentions published in early October, showed ongoing positive investor attitudes towards UK commercial real estate.
Appraised UK real estate capital values have continued to show positive movements since the summer of 2024. This is attributable to a combination of modest rental growth and yield compression. All-property capital values recorded in the MSCI UK Monthly Index for September 2025 showed 2.6% annual growth, led by improvements in the industrial (+4.9% year-on-year), residential (+3.1%) and retail (+3.1%) sectors, whilst office values lagged (-1.4%). This underscores our view that following a significant correction in capital values of approximately 25% between mid-2022 through mid-2024, a nascent recovery is underway.
Amid the recent uncertainty, however, the momentum of the recovery has been weaker than anticipated at the start of the year. This is reflected in our revised UK all-property total return forecast, which stands at approximately 6% for 2025. We expect momentum to improve from next year with a projected UK all-property total return of approximately 8% p.a. over the next five years. Both are comfortably above the average of the last 10 years of 4.3%.
Investment outlook
Sector views: Industrial and data centres
In terms of our current asset views, we continue to favour industrial estates (including outdoor storage facilities), cross-dock warehouses and urban logistics assets benefitting from positive e-commerce and urbanisation trends. We believe that the recent turmoil around tariffs is likely to lead occupiers to review supply-chains and accelerate nearshoring activity.
There is a growing threat of obsolescence in the sector, with over 50% of UK stock older than 10 years (source: JLL) and many major occupiers having introduced carbon reduction targets. However, this supports demand for new and refurbished space going forward.
Access to sufficient power, preferably from renewable sources, is also high on occupiers’ agendas, creating scope for owners to garner incremental income from ‘electrifying’ facilities through the provision of onsite charging and power generation. The strong growth in AI continues to fuel the demand for data centres, a sector that sees strong investor interest. While specialist assets, data centres provide long-term income given their critical role in supporting the digital economy.
Sector views: Retail and office
The retail sector appears to have stabilised, with recent valuation data showing signs of a recovery in multiple pockets of the sector following a decade-long period of adjustment. While we remain cautious of ongoing headwinds to consumer spending and persistent margin pressures for retailers, elevated income yields on what may be increasingly considered rebased rental levels provide for potentially attractive prospective returns. Our preference remains for retail parks attracting discount and mid-market retailers, as well as the more resilient convenience formats.
In the office sector we remain selective, favouring well-located, high-quality offices with sustainability certifications1 in London, major regional centres, and knowledge-driven cities. Recent announcements from major corporations indicate an increased return to the office, albeit hybrid working arrangements will be a permanent feature. Remit Consulting data shows office utilisation levels reaching post-pandemic highs especially in core central business districts (CBDs).
As a result, occupiers are expected to continue to seek high-quality space to attract and retain talent, encourage attendance and foster collaboration. Modern office space is already scarce across major UK CBDs. As such, the imbalance between constrained future supply and rising demand for ‘best-in-class’ is likely to intensify.
Sector views: Operationally-intensive real estate (self-storage, ‘living’ segments)
UK real estate portfolio allocations continue to evolve to include more operationally-intensive real estate segments able to provide, at a minimum, inflation-linked cashflows. These can be delivered both directly and indirectly, with outsized income growth potential aligned to the success of the business activities taking place within the properties.
This includes self-storage, which is benefitting from the growth in the number of households and e-commerce as well as representing an attractive consolidation opportunity. Living and ‘social infrastructure’2 segments such as medical centres provide long-term resilient cashflows, driven by longer-term demographic trends rather than economic cycles.
There remains a sizeable opportunity for private capital to fund the development of affordable and social housing3 formats that can subsequently provide contractual inflation-linked income and positive impact attributes. This strategy is set to benefit from strong government policy support.
Secondaries and recapitalisation opportunities
Lastly, we believe that direct secondaries and recapitalisations are increasingly attractive strategies, as evolving industry dynamics have created a growing need for both capital solutions and specialist operational expertise, especially in the emerging range of adjacent segments requiring specialist management expertise. At the same time, capital value declines of 20-30%+ have exacerbated balance sheet and asset funding challenges, given that the limited capital raised has been uneven with a focus on a narrow range of strategies.
1Sustainability certifications are accreditations which assess sustainability credentials of buildings, for example BREEAM.
2In this context only, we are defining social infrastructure as healthcare, employment opportunities, education and training.
3As defined in Annex 2 of the National Planning Policy Framework or any subsequent regulatory definitions, as well as specialist housing, sheltered housing and other forms of housing for residents facing homelessness or other crisis situations, whether regulated or otherwise.
Subscribe to our Insights
Visit our preference center, where you can choose which Schroders Insights you would like to receive.
Autheurs
Topics