Aberdeen Investments has published its Q2 2026 Real Estate Houseview, assessing the implications of the Middle East conflict on the macroeconomic environment and outlook for real estate across the UK and Europe.
The latest outbreak of geopolitical risk marks a significant inflection point for markets. Rising oil prices, heightened inflation risks and increased interest rate volatility are reshaping expectations for growth and monetary policy, creating a much more uncertain near‑term environment for investors.
While real estate is better placed than during previous energy‑driven shocks, the Middle East conflict has materially shifted the balance of risk, reinforcing the need for discipline, selectivity and a strong focus on income durability.
Aberdeen’s central base‑case scenario assumes high oil prices persist through the near-term before easing later in the year. However, the probability of more adverse outcomes, including a prolonged supply‑driven energy shock or stagflation, has increased meaningfully, resulting in greater dispersion across markets, sectors and asset quality.
Anne Breen, Global Head of Real Estate at Aberdeen Investments, said:
“The current conflict in the Middle East has fundamentally changed the near‑term risk profile for markets. For real estate investors, this is not about avoiding risk entirely, but about understanding where resilience really lies.
“While higher energy prices and tighter financial conditions create challenges, real estate today is better positioned than in previous cycles, with stronger income foundations, lower leverage and clearer sector differentiation.”
“In both the UK and Europe, selective exposure to income‑resilient sectors, alongside disciplined underwriting and active management, will be essential as markets adjust to this new geopolitical reality.”
Geopolitical risk and the macro backdrop
Higher oil and gas prices from the current geopolitical volatility are feeding through to headline inflation, complicating the policy outlook for central banks and increasing the likelihood that policy remains tighter for longer than previously anticipated.
Aberdeen’s scenario analysis reflects a wide distribution of outcomes. While a base‑case assumption still sees energy prices easing soon, the probability of more adverse scenarios has increased, including a prolonged supply shock or a stagflationary environment in which central banks are forced to tighten monetary policy in spite of growing recession risks. This combination would weigh on occupier demand and investor sentiment, acting as a double impact on capital values, particularly in more cyclical sectors.
Importantly however, Aberdeen notes that the current environment is not a repeat of 2022. Real estate valuations have already adjusted, yields are higher and debt is more conservatively structured. As a result, while volatility is likely to persist, the overall downside risk to real estate is more contained, particularly in income‑focused strategies. Furthermore, the already limited supply pipeline faces even more headwinds, increasing our confidence that some of the lost momentum can be recaptured through basic demand and supply fundamentals and rental growth once the market finds its feet.
Offices: polarisation intensifies
The UK office market remains highly polarised. Prime, well‑located assets in central London, particularly in the West End, continue to benefit from tight supply and sustained occupier demand, driving rental growth despite a more uncertain economic backdrop.
These defensive sub‑markets are better positioned to withstand higher rates and weaker growth, supported by a lack of new development. In contrast, regional and secondary office markets are more vulnerable under adverse macro scenarios, where weaker demand and limited pricing power could translate into softer performance. Capex spend to modernise offices will continue to be prohibitive, leaving markets even more undersupplied over the medium term.
In Europe, office markets are navigating a slow and uneven recovery. Prime assets in supply‑constrained cities have performed well, with reduced development pipelines helping to support rents. Super prime Paris offices have possibly hit a ceiling and we prefer B+ quality offices there or offices in other major European cities such as Amsterdam.
Industrials and logistics: short-term pain, long-term gain
UK industrial and logistics real estate remains relatively well supported, particularly outside London and the South East where affordability is stronger and vacancy rates are lower. Construction viability challenges and elevated build costs continue to restrict new supply, which should support rental values over the medium term.
However, renewed inflationary pressure and higher energy costs pose near‑term risks for tenant profitability, particularly within logistics segments exposed to retailers and third‑party logistics providers. The UK Purchasing Managers Index is already showing sharp increases in input costs. This reinforces the need for careful tenant and location selection.
Across Europe, industrial and logistics assets retain strong long‑term structural appeal but face greater near‑term caution. Supply‑chain disruption, higher input costs and more volatile financing conditions are weighing on sentiment, even as underlying long-term demand drivers remain intact. We prefer production and light industrials over big box logistics currently; near-shoring and fiscal easing is tied into the “Made in Europe” directorate which will drive industrial expansion in Europe, while prime low yielding logistics assets could look more expensive in a higher interest rate environment.
Retail: retailer profit margins could be squeezed
In the UK, retail performance continues to diverge by sub‑sector. Supermarkets and discount‑led retail parks remain among the most resilient parts of the market, benefiting from inelastic demand and essential spending patterns during periods of cost‑of‑living pressure.
High income yields and more limited sensitivity to interest rates provide additional support. By contrast, assets with a greater exposure to discretionary or leisure‑focused spending face a tougher environment as higher energy costs and inflation weigh on consumer confidence and push up operational costs too.
European retail has generally continued its gradual recovery, with retail warehouses performing well and seeing selective yield compression where capital flows remain strong. That said, higher inflation is increasingly seen as a headwind, putting pressure on tenant margins and pricing dynamics. While overall fundamentals are more stable than in previous years with record low vacancy rates, the sector remains highly dependent on asset quality, tenant mix and local competition.
Living sectors: structural support amid cyclical pressure
In the UK, living sectors continue to benefit from deep structural demand‑supply imbalances. Chronic undersupply of housing, combined with stubbornly high mortgage rates and reduced affordability for owner‑occupiers, is supporting tenant demand across the private rented sector.
While real incomes face near‑term pressure from higher energy costs, rental affordability remains more robust than in previous cycles, and institutional capital remains relatively under‑represented. Regulatory changes, including pressures on smaller landlords, may further reduce supply over time, reinforcing the long‑term case for professionally managed rental housing. Build‑to‑rent yields have stabilised, and while investment volumes remain cautious, income fundamentals provide a meaningful floor.
Across Europe, residential real estate remains one of the most defensive sectors, although compacting margins are starting to temper optimism in some markets. Structural undersupply continues to support rental growth, particularly in urban centres, but the impact of higher interest rates is more pronounced in markets that are low yielding or heavily reliant on leverage.
Vacancy rates have begun to rise modestly in certain sub‑segments where supply has increased, but overall fundamentals remain supportive, especially in countries with stronger energy insulation and lower exposure to external shocks.
Income resilience and selectivity key
Across both the UK and Europe, income remains the primary anchor for real estate performance in an environment of heightened volatility. While capital values may face renewed pressure under adverse scenarios, rental income, indexation mechanisms and constrained supply provide a degree of protection not available during previous shocks.
Aberdeen believes the next phase of the cycle will reward active management, careful asset selection and geographic flexibility, as investors navigate a landscape shaped increasingly by geopolitics, energy security and policy uncertainty.