Key highlights

  • The outlook for UK real estate remains fragile, but it is expected to improve as we move into 2024
  • Investors are taking a risk-off approach towards the sector in the face of macroeconomic headwinds
  • We remain in favour of sectors that benefit from longer-term structural growth drivers 
  • UK Real Estate Outlook Chart 1: UK Inflation Rate and Bank of England Policy Rate Forecasts

    Source: abrdn, October 2023

    Forecasts are a guide only and actual outcomes could be significantly different.

    UK economic outlook


    Sizeable revisions to gross domestic product (GDP) data suggests the economy recovered more quickly from the pandemic shock than was originally thought. The economy suffered a slightly smaller supply-side shock and productivity growth was better. However, the revisions do little to change the near-term outlook for the economy. Indeed, with weakness in the services sector, which dragged the September composite flash purchasing managers’ index down to 46.8, the risk of the economy entering a formal recession even earlier than we had expected is increasing. Monetary policy tightening is starting to bite in earnest, with the full impact still to be felt.


    The annual rate of inflation fell to 6.7% in August, with broad-based disinflation helping to offset an increase in fuel prices and duty. Significantly, core inflation fell from 6.8% to 6.2%, while services inflation fell from 7.4% to 6.9%, well below the Bank of England (BoE)’s forecast of 7.2%. This suggests that underlying inflation pressures are starting to recede. Headline inflation should fall further during the rest of the year, as food-price growth continues to fade and large energy base effects take effect in October. However, wage growth is still running well above a target-consistent rate.


    We think the BoE’s decision to keep interest rates on hold at 5.25% means that the bank rate has peaked. If wage growth and services inflation were to surprise on the upside, then a hike in November is still possible. But we think these conditions are unlikely to be met. The BoE wants to guide market expectations towards a ‘Table Mountain’ profile for interest rates, which sees rates staying elevated for an extended period. This view is designed to keep a grip on current financial conditions and we expect rate cuts to start around the middle of next year.

    (%) 2020
    2021 2022 2023 2024
     GDP  -11.0 7.60 4.10 0.40 0.00 1.60
     CPI  0.90 2.60 9.10 7.30 2.40 2.00
     Policy rate 0.10 0.25 3.50 5.25 4.00 2.50

    Source: abrdn October 2023
    Forecasts are a guide only and actual outcomes could be significantly different.

    UK real estate market overview

    UK real estate pricing has been stabilising during 2023, following the significant correction in the sector in late-2022. However, performance has been asymmetric across sectors, with those benefiting from structural and thematic tailwinds proving more resilient in the face of a weaker macroeconomic environment.

    According to the MSCI monthly index, all property recorded capital value growth of -1.6% in the third quarter of 2023. The industrial and residential sectors led the way with positive growth of 0.5% and 0.3%, respectively, over the quarter. Conversely, the office sector continues to drag, and recorded capital growth of -5.0% in the third quarter of 2023, as the sector struggles with changing working habits and a higher-rate environment.

    Total return performance has also improved, with All Property recording returns of -0.2% in the third quarter of 2023. The residential sector led the way at 1.8%. Over the previous six months, total return performance has been positive for most sectors, again with the exception of offices, which continue on a negative trend and recorded performance of -6.4% in the six months to September 2023.

    While performance has shown tentative signs of stabilising, the investment market has remained muted as investors have taken a risk-off approach towards the sector. In total, there have been approximately £24 billion worth of UK real estate transactions so far this year (to the end of September), according to Real Capital Analytics. This is 54% lower than the same period a year earlier. It demonstrates slower investment volumes as investors have stepped back from the market. Investor appetite has remained robust for industrial assets, which accounted for 25% of total transaction volumes. Demand for the living sector continues to grow, making up 21% of volumes so far this year (to the end of September), versus just 6.7% in 2013.

    However, a lack of good-quality investment stock being brought to market has helped to suppress transaction volumes, so far this year. In many cases, asset holders remain unwilling sellers, given the significant disconnect that exists between buyer and seller aspirations. As a result, investors who are not required to sell at this point are unlikely to do so before an improvement in the wider macroeconomic environment.

    Given the market backdrop, there is little indication that activity will substantially improve over the remainder of the year, with greater activity likely to be prompted by further clarity on the direction of UK monetary policy. However, given the threat of rates staying ‘higher-for-longer’ and a significant number of debt maturities due in 2024, greater transactional activity may be spurred by pockets of stress forming.

    Outlook for risk and performance

    While the outlook for UK real estate remains fragile, an improving economic picture as we move into 2024 is likely to help spur an improvement in UK real estate performance. While some headwinds remain, such as weak national and global economic activity, falling inflation and an end to the BoE’s monetary hiking cycle is likely to help revive investor sentiment towards the sector.

    That said, any negative surprise in economic activity or inflation data will spook investment markets and may result in further instability in real estate performance and pricing. As a result, investors are expected to remain risk-off towards UK real estate, with investor appetite remaining focused on those sectors that benefit from longer-term thematic growth drivers. These sectors are forecast to provide more robust performance, even in the face of a weaker macroeconomic environment. Additionally, investors will be narrowly focused on good-quality accommodation within these sectors, which provide the opportunity to capture rental growth.

    In response, polarisation in performance is anticipated to accelerate from both a sector- and asset-quality perspective. Sectors that face structural pressure (such as offices), and secondary assets that don’t meet current occupational demand, are expected to record further capital value declines and weaker performance. Occupational performance is forecast to be the main driver of returns in the near term. Given the nature of current occupational demand, good-quality accommodation is expected to prove more resilient.

    Although the outlook for monetary policy appears more positive from this point, a meaningful improvement in UK real estate performance is not expected until the second half of 2024. In the face of a weaker economic environment and with the risk of the bank rate staying higher for longer, investors will retain an overall risk-off approach towards the sector. A rate-cutting cycle should then encourage investors to return to the market.

    Given the elevated risk levels and the delay in the turning point to early 2024, we currently believe in a low-risk approach. This means reducing leverage and development exposure, reducing voids and retaining higher cash weights. We also believe that strong opportunities to benefit from better entry prices for core- and value-add assets will arise for investors from today.

    UK total return forecasts from September 2023

    UK Real Estate Outlook Chart 2: UK Total Return Forecasts from September 2023

    Source: abrdn October 2023
    Forecasts are a guide only and actual outcomes could be significantly different.