UK Real Estate: Closing 2025 with Stability and Entering 2026 with Cautious Confidence

Authours:

James Routledge, Real Estate Advisor
Philip Shearer, CCO at Thompson Taraz

Introduction: A More Stable Platform for 2026

Although geopolitical uncertainty remains a prominent global risk, the UK real estate market enters 2026 with greater domestic macro-stability than at any time in recent years. Inflation has normalised, interest-rate expectations have stabilised, and political and fiscal direction are clearer than during the volatility of 2019–2023. For now, markets have broadly given the government the benefit of the doubt—creating a firmer platform for underwriting, valuation and capital allocation.

The late-December interest rate cut (25bps to 3.75% on 18 December) reinforced the sense that the UK has likely passed the peak of its monetary tightening cycle. Gilt yields have moderated, and the Bank of England’s forward guidance is more predictable than in recent years.

However, post‑Budget sentiment remains mixed, and investors seeking to re-engage with investment activity are grappling with a subdued outlook for the UK economy. Real estate performance remains uneven and increasingly driven by asset-level fundamentals, capex obligations and operational capability rather than sector-level narratives.

Macro Conditions: Clearer, but Still Demanding

Inflation (CPI) rose to 3.4% in December 2025, underscoring the slow and uneven progress  towards the Bank of England’s  2% target.This will likely constrain Bank of England’s pace of rate cuts across 2026.

10-year gilt yields ended 2025 at 4.47%, materially lower than their 2023 highs. This stabilisation has improved underwriting visibility, and should support more confident capital allocation, although it remains contingent on inflation continuing to moderate, disciplined fiscal policy and the absence of major global shocks.

FTSE indices delivered modest but stable performance through 2025. The FTSE 100 (up 21.5% over 2025) benefited from its international revenue base, while the broader FTSE All-Share (up 8.96 %) saw muted but positive returns. REIT discounts narrowed through Q4, signalling improving sentiment toward real estate equities.

Overall Property Performance: Stabilisation but Uneven Beneath the Surface

The CBRE Monthly Index for UK commercial real estate recorded total returns of 7.1% for the full year to end December 2025, of which 80% was driven by rental income and 10% rental growth, meaning that on the whole yields were largely stable.

Retail and Industrial assets rank as the strongest performers for 2025, whilst residential eased and prime office total returns turned positive. Importantly, this flat to positive pattern marks a clear contrast to the volatility of recent years, offering investors greater visibility as they reassess strategy and capital allocation.

Whilst this high-level picture is constructive, the figures are shaped by institutional-grade portfolios. Smaller, secondary, mixed-use and repurposing assets largely outside benchmark datasets – continue to show the wider performance dispersion and the strongest potential for specialist managers to add value.

Property Sector Trends

Trends that are likely to shape real estate asset-level decisions include:

• Low investment volumes in 2025 to gradually increase in 2026, influenced by a relatively stable economic environment, the cost of debt and narrowing pricing gaps.
• The UK remains one of the leading destinations for international real estate capital, supported by assets having re-priced more quickly than may other countries, alongside market transparency. As such the UK market provides a relatively attractive price-point.
• Rapid adoption of AI will touch all asset classes, particularly the office sector, promising transformative potential in PropTech and fuelling a data centre boom.
• Development viability will remain a key constraint on new-build activity in 2026 – whilst build-cost inflation has moderated it has not reversed, the cost of debt remains above long-term averages and forward funding is hard to secure.
• Continued bifurcation between prime/ESG-compliant stock and secondary/obsolete assets, with an overall focus on quality and reliability of income.
• Acceleration of office re-purposing. Prime stock to remain in short supply, driving prime rentals in stronger centres; with London and core regional cities best placed to benefit.
• Stability in industrial overall, but demand fragments between well-located, power-enabled units and peripheral stock lacking infrastructure.
• Specialist managers to gain relevance as dispersion in returns persist. Managers specialising in repurposing opportunities and operationally intensive strategies are playing a larger role. 

Conclusion

The UK enters 2026 with improved macro clarity and stabilising real estate markets. Yet performance remains uneven, and asset-level fundamentals matter more than ever. Managers who combine discipline, operational capability and strategic clarity - supported by robust governance and administration - will be best positioned to capture opportunities in a selective but improving market.

TT’s role in these market dynamics

At TT we have worked with several new clients in the last 12 months who are absolutely representative of these asset level, and broader market level, themes. They possess track records to support their business plans, and clear, carefully crafted strategies underpinned by their conviction in that strategy and their ability to execute it. Furthermore, the start of the new year has already delivered clear signs of an uptick in activity and positive intent.

Our clients have chosen to partner with us due to their desire to work alongside an operational partner that possesses the same expertise in their subject matter, with the added benefit of our decades long, extensive real estate asset class experience. With a desire to retain their core focus on deals and investor sourcing, at a time when the market sentiment, at an asset and investor level, is shifting favourably for progress and success, working with us to expertly handle their back-office and middle-office fund operations is viewed as a strong foundation to underpin the clients’ activity. Our AIFM, Administration, and Depositary service lines, as a combined solution, deliver a consolidated, efficient, and genuine value-add operational platform for these funds. Helping to provide the clients and the funds with enhanced likelihood of building and succeeding through the effective operation, governance, and administration of the funds.

Should you wish to discuss how we can help support you in the setup and operation of a new real estate fund, please get in touch, and we can work closely alongside you to put in place the necessary operational components to work through to the successful closing of the fund, and ongoing investor performance.