Will 2026 be different?

Our last yield meeting of the year has confirmed that, once again, there is not enough evidence to support a movement in any of our prime yields. This leaves our end 2025 all sector prime yield at 5.91%, compared to 5.98% at the end of last year.

With some subsectors, such as City offices, having been stable for 28 months, we must address the question of what might change in 2026. We delve deeper into the implications of the UK Budget below, but as far as commercial property goes, our core view is that it didn’t change the outlook. The UK economy is going to grow more slowly in 2026 than 2025, and this would raise questions about rental growth in an environment where demand is the driving force behind that growth. However, the above-average prime rental growth that all sectors have seen since Covid has more to do with lack of supply than strong demand, and nothing on that front looks likely to change in 2026.

Development viability will remain challenged by the costs of debt and construction, and we do not see either falling in 2026. While there will be another two or three base rate cuts in 2025/26, the odds of these synchronously feeding through to property yield hardening are low.

However, property in the UK remains cheap, rental growth better than average, and confidence is improving. This alone leaves us confident that transactional volumes will be 10% higher next year.

So, can we stop talking about the Budget now?

This year’s Budget was unprecedented, at least in terms of the unprecedented levels of kite-flying, briefing, and leaking. However, using a very narrow definition of ‘success’, it was one.

From a commercial property investment point of view, the worst possible outcome would have been a Truss-like bond market rout. We did not get this, and the risk-free rate has moved back to where it was at the start of November. However, as we wrote a number of times before the Budget, we wanted but didn’t get a set of policies that would mean that speculation about future tax rises and spending cuts would reduce. The Chancellor’s strategy seems to be based around the hope that UK GDP growth is stronger than the OBR is forecasting, and this would mean that she can either reduce some of the planned tax rises or public spending just before the next election.

As the chart below shows, hoping to change the pace of productivity growth from its post-GFC doldrums is probably the Christmas wish to end all wishes. Indeed, the biggest disappointment about Budget 2025 was how little attention was paid to growth at all, particularly since this was a core part of the Labour manifesto that won the election.

The UK is not alone on this front, with most of the G7 all facing weak productivity growth and rising debt costs. The Chancellor seems to have convinced the markets that we are no less stable than our peers, but the questions around growth and spending will remain with us for some time.

However, the enemy of investment is often uncertainty, and we believe that Budget 2025 has reduced some short-term uncertainty.

Looking ahead, the best opportunities for prime yield hardening might be where the spread against the sector is wider than normal, or where yields are well above their long-run averages.

Most retail and office sectors have a prime yield above their long-term average, in many cases more than 100 basis points (bps) above average. Prime shopping centres are the only subsector where the yield remains higher than it was during the Global Financial Crisis (GFC), with SE Offices and High Street Retail in line with their levels in the GFC.

It is also within offices where the widest spreads exist between locations, with the spread between the City of London and West End at 150 bps (compared to an average spread of 90). The spread between the City and both the SE and Regional prime office yields is also much wider than normal.

Given the fairly similar occupational market metrics in all of these locations, this does suggest more potential for yield hardening in some locations than others.

To further discuss the latest insights, please contact the UK Investment or Commercial Research team via the Authors panel