Economic Market Update

The UK economy is in an interesting place. Not because it is doing anything fundamentally exciting, but because it is facing such a melee of competing pressures that is it is hard to provide a simple overview of current conditions. It is experiencing negative geopolitical pressures, affecting bond yields and energy prices, positive tailwinds from good weather and a World Cup boosting spending, while at the same time seeing a labour market that is both stable and expected to weaken. When you add on a new Prime Minister with great ambition and miniscule budget manoeuvrability, the picture is, for want of a better word, mixed.

Normally at this point of this note we’d present an array of statistics to describe the situation in beautiful, numeric detail. Given what we say above, this may confuse more than it would clarify, so let’s draw out some bigger themes instead, and let’s begin with inflation.

Headline CPI has surprised to the downside for the last three months, coming in below where was expected. This appears to have been due to a combination of base effects, pricing restraint from manufacturers and retailers, and the fall in energy prices between May and mid-July. Whilst clearly good news, inflation is highly likely – and widely forecast – to pick up over the coming months. The renewal of conflict in the Middle East and renewed jump in oil and gas prices will be among the drivers. The upshot is that lower inflation now does not preclude higher inflation later.

Second, interest rates. The Bank of England’s MPC held rates steady on Thursday, as was widely expected. Looking to the future there are divergent views. Financial markets are pricing in rate hikes – as evidenced by continued increases in OIS rates – while economists are broadly in agreement (for now, at least) that rates will remain on hold: the MPC will “look through” the current inflationary blip. Stepping back from overnight rates, and we have seen the 10-year government benchmark bond yield exceed 5% in July for only the second time since 2008 (the previous occasion was in May). The take-away is that rates aren’t coming down and will likely remain volatile.

Lastly on growth. The aggregation of all activity in the economy (aka GDP) continues to show growth, and at a fair clip, despite headwinds and elevated uncertainty. The consensus forecast for 2026 is for growth of 0.9%, this is just down from a forecast high of 1.0% but up from a low of 0.6% as forecast in April. To put this in context, trend growth is estimated to be around 1.5%, so we are running at two-thirds of our target speed. This isn’t bad, but it leaves little scope for improving the public finances as we are sure the incoming Prime Minister and Chancellor would like.

All-in-all, the economic picture is complicated and mixed. But it is not bad, nor especially good either. 

The first half of 2026 saw UK commercial real estate investment reach £18.1 billion, excluding last year's large Q1 Annington portfolio deal, volumes grew 9% year-on-year, reflecting sustained appetite from investors with conviction in UK fundamentals. International capital remained central to market activity, accounting for 46% of total investment, with European buyers leading regional flows alongside significant deployment from North America and Canada. This continued cross border investment reinforces the UK's position as a market where global capital can transact with confidence, finding opportunities across multiple sectors.

Offices held the largest share at 29% of total investment, anchored by significant transactions including Barclays £750 million acquisition of One Churchill Place. This was then followed by living at 25% share, industrial at 17%, hotels at 13% and retail at 12%. What has emerged is that genuine opportunities exist across all sectors. This diversification is a real strength of the UK, offering investors meaningful choice and positioning the market well for sustained activity as capital continues to identify quality assets that align with long-term value creation. Keep an eye out for our H1 infographic being released soon. 

London Office

Activity in the West End led the market this quarter, totalling 1.2 million sq ft and marked the first quarter since Q3 2021 that West End volumes exceeded those in the City. West End volumes were the strongest recorded since Q2 2022 and stand 35% above the long-term quarterly average. 

Regional Office

Across Prime rents in the Big continued to move upwards in Q2. With an ongoing scarcity of good quality space and steady demand for the best space across the Big 6, average prime rents moved up to £48.17psf, a rise of 8.2% year-on-year.

Industrial & logistics

Take-up of new industrial floorspace in the 5,000-99,999 sq ft segment totalled 3.1 million sq ft in H1 2026, 27% higher than the same period last year. With 2.9 million sq ft currently under offer, momentum is set to continue into the second half, even as available supply remains relatively constrained at 23.8 million sq ft nationally.

Retail

Record breaking June temperatures and improved economic optimism drove UK retail sales 5.4% higher year-on-year in volume terms, pushing them above pre-pandemic levels for the first time, though analysts caution that autumn energy price increases may temper the momentum.

Living

After a subdued Q1, UK BTR investment surged in the second quarter, propelling H1 2026 volumes to near-record levels and underscoring sustained appetite for professionally managed residential assets.

Life Sciences

GSK has confirmed a £400 million investment to establish a major new global research and development (R&D) centre on Discovery Drive at the Cambridge Biomedical Campus.

Data Centres

Despite objections from the local council a 107MW data centre in Slough has been approved by the UK government. Developer Manor Farm Propco applied for planning permission in early 2025.

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