Yields remain stable, though further rate rises are expected. However, shortages of prime assets could put some sectors under downward yield pressure.
Push and pull factors confuse pricing
Our average prime yield was broadly stable in October, but this headline number hides some interesting push and pull factors that are currently present in the market.
The outlook for investment is now even more closely linked to the expected forward path for borrowing rates. While we do not support the bond market view of three to five rate rises ahead, we do think there is potential for one more rise in spring 2027. This tension is behind the upward yield arrows that we added this month, and the fact that all of the Office and Industrial segments have either seen yield softening or impending yield softening this year.
Some readers might be more surprised by the fact that we added a downward arrow to the Open A1 Retail Warehouse this month, signalling that we expect to see yield hardening in the next few months. This is the first indication of a wider trend we have been experiencing across all sectors over the summer, where a pool of highly motivated Core buyers are competing for a handful of prime assets. This is beginning to stimulate a widening of the spread between Core and Core+ pricing, and this could well lead to a short-term dislocation in pricing across all sectors in the new year.
The other trend that looks notable at the moment is the position of Offices in the league table. For only the second time in 36 years, our prime Office yield is higher than the equivalent for Retail and Industrial. Some readers might feel that this is right-pricing, given the threats from AI and obsolescence, but we believe the strong prime rental growth story will be maintained in 2027, and this starts to make some Offices look cheap.
Time for a reality check?
You will have read enough about the Autumn Budget by now, so we hesitate to even mention it. However, while it has clearly not frightened the financial markets, it has left the fundamental questions facing this government around tax and spend unanswered. The commercial property investment market is at a similar juncture, with an optimistic outlook for the occupational markets in 2027, but yet again nobody able to point to what might change in the investment market.
Some commentators suggest vendors need to be more realistic on pricing, and while this is always the case (especially from a purchaser’s point of view), it probably isn’t the whole answer. As the chart below shows, North American prices were 56% below their pre-Covid average in Q3 2026, compared to the UK at 34% lower. Investment volumes, however, are 49% above average and 6% below average, respectively.
Are investors also suggesting that there is something more challenging around investing in the UK than other domains? There is no doubt that the perception of the UK as being politically stable has been weakened since 2016, but the comparatively higher bond pricing doesn’t seem to reflect the fact that Britain has been better at reducing its debt-to-GDP ratio than many of our competitors.
Investor perception is, however, much more important for the UK than for some of our competitors. Typically, in excess of 50% of the buyers here are non-domestic, while in France and Germany it is more like 40%, and in the USA 10%. This means the UK is much more exposed to periods of lower than normal cross-border activity, and this is the situation at present.
It is great for London to proclaim it was the world’s most popular destination for cross-border investment into real estate for 2016–2026, but this becomes a problem when global cross-border activity has fallen from $438 billion in 2021 to $211 billion in 2025.
So what needs to change in 2027 for cross-border activity to return, and then rediscover the joys of UK real estate? The first hurdle is geopolitical stability, and the optimist might suggest that after the US midterms and Israeli election, some of the heat in the Middle East might reduce.
A recovering global economy will follow on from reduced energy price stresses, and this will rebuild investors’ purses. The question then comes about whether real estate is losing its lustre where returns from bonds, infrastructure and equities are higher. With the UK average prime yield at over 6%, we believe that the sector is looking more competitive than it has for a while, and this should lead to a steady recovery in investor interest in 2027.
To further discuss the latest insights, please contact the UK Investment or Commercial Research team via the Authors panel