UK Capital Markets Outlook 2026

From repricing to stabilisation

We expect the UK commercial property capital markets to move into a phase of stabilisation and gradual recovery through 2026, rather than a sharp rebound in activity. Following an extended period of repricing, sentiment has begun to improve, supported by greater clarity on interest rates, more realistic pricing expectations and a growing willingness to transact.

Recent MSCI performance data supports this shift in tone. Over the past 12 months, all-property total returns reached 6.6%, with income returns of 5.0% accounting for the majority of overall performance as capital values stabilised, while capital growth improved to a modest positive contribution of 1.6%, having been negative in the prior period, supported by continued, albeit stable, rental growth. This reinforces the view that the market has entered a stabilisation phase, with performance led by income rather than capital appreciation. While conditions remain uneven across sectors and asset quality, sentiment is materially more positive than over the past two years.

Pricing clarity and the return of liquidity

A defining feature of the current cycle is the gradual narrowing of the pricing gap between buyers and sellers. As bid-ask spreads continue to compress, pricing clarity is improving, which we expect to translate into a higher proportion of deals reaching completion. This reflects growing alignment rather than aggressive yield compression, as both sides of the market adapt to a new pricing reality.

The medium-term performance context reinforces this assessment. Over the past five years, MSCI all-property total returns have averaged 3.1% per annum, materially below long-term norms, with capital growth remaining negative at -1.5% per annum. This highlights the depth of the adjustment that has taken place and explains why the recovery in liquidity is expected to be steady rather than rapid as the market continues to absorb reset pricing levels.

Debt markets turning supportive

Debt markets are also becoming more constructive. As interest rates continue to ease, borrowing costs are becoming increasingly attractive, encouraging investors to re-engage with leverage. UK high street banks are once again active lenders, providing an important foundation for transactional activity and reinforcing confidence across the market.

Importantly, interest rates are no longer the dominant factor shaping investment decisions. Investor focus has shifted towards asset quality, income durability, capital expenditure requirements and long-term relevance. This is consistent with recent return profiles, where income has been the primary contributor to performance across all major sectors, reinforcing the appeal of well-let, defensive assets with sustainable cashflows.

Offices: selective re-engagement amid ongoing polarisation

Improving confidence is also evident on the occupier side. Since the Budget, a growing number of corporate occupiers are in a position to make strategic decisions around expansion and space requirements, supporting an improvement in occupational fundamentals for prime and best-in-class offices.

As leasing conditions stabilise, institutional investors are beginning to re-engage with the office sector, albeit selectively and with a strong preference for assets that meet modern ESG, amenity and location criteria. While MSCI office capital growth remains negative on both a 12-month and medium-term basis, this selective improvement in occupier demand is expected to support liquidity and pricing stability for the highest-quality assets. Larger single-asset office transactions are therefore expected to return, particularly in London and the strongest regional cities.

However, the polarisation between prime and secondary assets will remain pronounced. Secondary offices continue to face structural challenges, with assets unable to meet evolving occupier and regulatory requirements, struggling to attract both tenants and capital. MSCI data continues to show weak office capital growth on a multi-year basis, underlining the scale of obsolescence risk. Many of these assets are likely to be considered for repurposing, including residential conversion where viable, while large, inefficient office buildings remain particularly problematic.

Diverging sector performance

Beyond offices, sector performance will continue to diverge. Industrial and logistics assets remain a core focus for investors, underpinned by resilient occupational demand and constrained supply. MSCI data highlights the sector’s structural strength, with industrial delivering a 9.1% total return over the past 12 months, broadly in line with the strongest-performing sectors, and an 8.1% annualised return over the past five years, albeit with significantly higher volatility than other sectors, reflecting the sector’s sharp repricing following the Covid-era expansion. Industrial rental growth peaked in 2022 and has been on a broadly decelerating path since, although competition for high-quality stock is expected to drive selective yield tightening.

The living sectors, particularly build-to-rent, are also expected to attract growing institutional interest, supported by structural undersupply and the appeal of long-term, income-led investment strategies. MSCI residential performance continues to be underpinned by resilient income returns, reinforcing the sector’s role as a defensive allocation within diversified portfolios, despite more limited capital growth in the near term. The retail sector should continue its recovery, although challenges remain. MSCI retail total returns have improved over the past year, driven by stronger rental performance and some modest improvement in yield sentiment, with retail marginally the best-performing major sector over the period at 9.2%. However, business rates continue to weigh on occupier affordability and investor underwriting, reinforcing ongoing polarisation between stronger and weaker locations.

Risks and outlook

While risks remain, particularly around elevated construction costs and ongoing geopolitical uncertainty, the market is becoming increasingly resilient. Investors and occupiers are adapting to operating in a more complex global environment, reducing the disruptive impact of external shocks. Development activity is likely to remain constrained by viability pressures, reinforcing the importance of existing, well-specified assets and refurbishment-led strategies.

Overall, the outlook for 2026 is one of cautious optimism. Recovery will take time and will not be uniform, but stabilising yields, income-led returns, and gradually returning capital are laying the foundations for a more functional and liquid market. For well-capitalised investors with a clear focus on quality and long-term fundamentals, we expect conditions to become increasingly supportive as the cycle progresses.

*Source: Carter Jonas Research, MSCI (Quarterly Digest)