Colliers’ latest Q2 UK Real Estate Investment Forecasts (REIF) report points to a more subdued outlook for the UK real estate market, with total return forecasts for 2026 revised down from 8% to 5% as inflation risks and tighter financing conditions dampen activity.
Despite a stronger-than-expected start to the year, UK economic momentum is expected to weaken, with inflation forecast to rise above 4% in the coming months and interest rates likely to remain higher for longer. This is weighing on investor confidence, with the RICS Investment Sentiment Index falling further into negative territory and credit conditions tightening sharply.
UK investment volumes fell from £19bn in Q4 2025 to £9.3bn in Q1 2026, around 30% below the five-year average, as lending constraints and uncertainty stall deal activity.
Oliver Kolodseike, Head of Research & Strategic Insights at Colliers, commented: “The UK economy made a strong start to the year, but rising geopolitical tensions and renewed inflation concerns have led to a more cautious outlook for real estate investment. However, the fundamentals remain intact, and we expect a recovery to emerge in 2027.
“In addition, we are seeing a more selective investment environment, where capital is targeting assets with secure income and strong fundamentals. Sectors reliant on capital growth are likely to see a slower recovery.”
Capital growth is now expected to be limited at 0.3% in 2026, with returns increasingly driven by income. Over the medium term, total returns are forecast to recover to 7.9% in 2027 and average 7% per annum between 2026 and 2030.
Retail and income-led sectors continue to stand out, with retail warehouses and shopping centres expected to deliver the strongest total returns over the next five years. However, retail investment volumes declined sharply to £1.2bn in Q1, the lowest level in over two years, while occupier demand remains under pressure amid weak consumer confidence.
Office markets remain highly polarised, with strong demand for prime, high-quality space driving rental growth, particularly in London where rents have reached £98.50 per sq ft. However, investment volumes have softened to £2.5bn in Q1, and secondary assets continue to face rising vacancy rates.
In the industrial sector, investment volumes fell to £2bn in Q1, although occupier demand remains relatively resilient at 6.3 million sq ft. Rental growth continues but has moderated, with further slowing expected in 2026.
Overall, the report highlights a market increasingly driven by income resilience and asset quality, with limited scope for yield compression in the near term.
