Surprised, but not stunned

Given the unprecedented scale of some of the impacts arising from the latest geopolitical shock unfolding in the Middle East, it would be reasonable to expect the property markets to have entered a ‘wait-and-see’ mode, if not full-scale panic. However, as our latest yield table shows, prime pricing continues to remain stable and is generally expected to do so in the immediate future.

The volume of investment transactions in the first quarter of 2026 was 6% down on last year and 29% lower than the 10-year average for the first quarter. However, this compares very favourably with the 30% fall in activity experienced immediately after the start of the war in Ukraine. Furthermore, according to RCA, the volume of pending deals at the end of Q1 2026 stood at a fairly typical £4.5 billion.

More anecdotally, conversations within our UK and European capital markets teams suggest that less than 5% of the assets we had expected to bring to market during the remainder of this year have been put on hold. Similarly, where we are bidding on behalf of investors, there have been very muted suggestions that now might be a good time to chip prices where there is conviction in the asset or asset class. There is definitely evidence that some price chipping is being attempted, but less evidence that these hopes are being met with a positive response by the vendor.

So, are commercial property investors becoming more thick-skinned when it comes to external shocks? At present, the answer seems to be ‘yes’, and thus we expect investment activity to be sustained – not suspended – through this crisis.

Quietly performing

The latest MSCI performance indices suggest that property performance has been broadly stable this year, with the UK monthly index flat in both March and Q1, with ERVs up 0.5% in Q1 2026. The larger quarterly index return continues to improve, from a 12-month return of -1% a year ago to 5.4% today.

Once again, it is the income-return-heavy subsectors that are leading the pack, with retail showing an average total return of 7.6% over the year to the end of Q1 2026, while industrial returned 6.1%. In the grand scheme of a 45-year average of 8.5% per annum total returns, this suggests that current returns are relatively normal by historical standards. Furthermore, this is against a background of almost no prime capital value growth over the last three years.

These facts alone suggest why investment volumes are proving relatively resilient in the face of yet another external shock (and very muted domestic economic growth). However, the shape of the recovery since Covid has been far less steep than any previous cycle, suggesting that competitive tension in the investment market remains relatively scarce.

Prior to the Iran conflict, our core view was that we would see gentle, but unspectacular, growth in investment volumes in 2026 and beyond. The rationale behind this view was that there was unlikely to be enough distress in the market to attract a surge in opportunistic buyers, and also that the returns on offer were not quite attractive enough to core buyers to inject more urgency into their bidding behaviour.

Our five-year total return forecasts for commercial property in the UK all suggest a reversion to normality. However, the bigger question is whether a total return of 8% to 9% is good enough when the cost of borrowing is relatively high and the returns on offer from other asset classes are higher than normal.

Traditionally, property returns have sat between equities and gilts on the risk and return spectrum, and as the chart below shows, this has broadly been the case over the last year. However, the spread of outperformance above property is significantly higher than normal, particularly for equities. Furthermore, the returns from lower-risk asset classes such as government bonds have been more in line with property than normal, presenting another reason to not invest in real estate.

This situation is unlikely to change in the immediate future, although we do expect that average property returns will creep closer to 10% over the next two years. This will be enough to bring a little more competitive tension into the market and drive some capital growth. However, prospects for a traditional V-shaped recovery remain limited.

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