UK Real Estate: Controlling the controllable

The macro

The macro backdrop for the UK remains challenging. We see elevated geopolitical uncertainty, persistent inflation risks and structurally higher interest rates likely to remain defining features of the investment environment. 

We believe it is prudent to assume that recent uncertainty remains embedded in market rates, supporting a cautious stance on UK real estate yields over H2 2026. We anticipate modest upward yield movement, with values supported by the post-2022 repricing and healthy occupational markets.

UK real estate positioning

Higher rates have squeezed the risk premium offered by UK real estate relative to credit. The spread of UK real estate equivalent yields to our ‘all-in credit yield’ has shrunk to 1.0% as at the end of June 2026, c.110bps tighter than its long-term average of 2.1%. 

We believe UK real estate is in a fundamentally different position to 2022. Higher real estate yields, combined with more modest upwards movements in real yields and inflation expectations, mean the risk to capital values is modest based on today’s market conditions, in our view. 

Nonetheless, a tighter risk premium means accepting lower excess returns or having conviction that rental growth can outperform fixed income. We consider the former unlikely given relatively attractive all-in credit yields and have greater conviction in rental growth, where our expectations exceed many forecasters.

Rental growth across UK real estate totalled 3.3% for the 12 months to Q1 2026[1]. Our positivity on the growth outlook is underpinned by persistent development constraints across sectors, alongside improving momentum for higher-quality retail and office assets following a period of structural change. 

Looking ahead

We expect annual average returns in excess of 6% over the 2026-2030 horizon, shaped by weaker performance in 2026 and a stronger recovery thereafter. While we remain positive on the medium-term outlook, we expect returns to decelerate in H2 2026 as yields move modestly outward. This reflects higher investor return requirements and still-constrained capital flows.

We do not view prospective value declines as severe enough to explain a delay in deployment, as investors likely won’t wish to forego income. Thin transaction markets may instead provide execution opportunities.

Segment over sector selection 

We see widening dispersion within sectors and, therefore, greater scope for outperformance through targeted asset and segment selection:

-       Industrial - we are more constructive than consensus. We expect supply-chain resilience requirements, defence spend and AI-driven efficiencies to combine with supply shortages to support rental growth. We see this as particularly true in urban logistics, self-storage, London multi-let estates and distribution warehousing. 

-       Living - values have softened in Multi-family and Purpose-built Student Accommodation (PBSA), reflecting moderating rental growth. We believe this could present a more attractive entry point given long-term fundamentals remain robust. Improving rental affordability and a lack of new supply, particularly post-2027, should support performance. We expect more near-term resilience from Affordable Housing and Single Family, and medium-term upside for London Multi-family.

-       Retail - prospects are good, but selectivity remains critical, in our view. We favour retail warehouses, supermarkets and select London retail. We remain cautious on shopping centres despite recent performance improvement, with vacancy remaining elevated and capex and op-ex risks significant.

-       Offices - We believe Central London offices present a compelling tactical opportunity over the medium term. We are more cautions on South East and out-of-town markets given high vacancy levels and operational and capital intensity.

-       Long income - screens positively with values correcting materially post-2022. Its inflation-linkage and resilient income characteristics screen well amidst an uncertain and inflationary macro environment.

While near-term performance prospects for higher-quality Retail and Office assets look promising, we would highlight the enduring relevance of longer-term megatrends, which we see as particularly benefitting Living and Industrial sectors, alongside parts of Hospitality. Balancing near-term performance and tactical opportunities with longer-term structural positioning remains critical. 

Generating alpha

A forecast return of 6.2% p.a. for the MSCI sample is in line with UK real estate’s long-term performance but falls beneath many investors’ target returns. While we expect stronger performance post 2026 (c.8% p.a.), in a market environment where income is expected to remain the dominant driver of returns, assets with stronger growth prospects, targeted added value initiatives and cost control are key to driving alpha, in our view.

Real estate continues to offer a broad range of investment styles and impact strategies. This opportunity set is bookended by long income and real estate platform investing. The latter involves equity investment into real estate operating platforms secured by the underlying properties. This has historically delivered returns ahead of traditional Value Add and Opportunistic real estate funds, with a lower correlation to the real estate cycle. 

In summary, we see expected average performance being reasonable. Potential outperformance from this average, after convictional segment and style decisions are made, is compelling.

Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecast will come to pass. 

Past performance is not a guide to the future.  

 
[1] 12 months to Q1 2026, MSCI Quarterly Digest