Key highlights


  • With inflation falling and likely to continue to do so, a rate cutting cycle commencing in the second half of 2024 looks more likely.

  • Capital value declines have moderated and shown tentative signs of stabilisation for the most favoured sectors.

  • Anticipating interest rate cuts in 2024, there's an expected improvement in the performance of UK real estate, leading to a higher 3-year annualized average total return of 6.7%, with variations across sectors.

UK overnight index swap forward curve 

UK economic outlook


UK gross domestic product (GDP) growth rebounded in November, expanding 0.3% month-on-month, which was slightly better than the consensus of 0.2%. Services activity was the main contributor. The Office for National Statistics also noted that fewer strikes in November helped boost growth. Meanwhile, construction activity was weak, in part because of the weather. The monthly profile of GDP remains extremely volatile after a contraction of 0.3% in October. The broad trend remains one of sustained stagnation. Recession-like conditions look set to continue in 2024, but the prospect of further fiscal easing to be announced in March should help to limit the extent of the downturn.  


UK inflation unexpectedly ticked higher in December, with the headline consumer price index (CPI) rate increasing from 3.9% year-on-year to 4%. The consensus was for UK headline inflation to drop to 3.8% in December. The rise was largely driven by an increase in tobacco duty, while food prices were once again a drag on inflation. Underlying inflation pressures were also slightly stronger than expected. Core inflation was flat at 5.1% year-on-year. Inflation may move higher again in January, following a slight uptick in the Ofgem price cap. However, the bigger picture is that headline inflation is still set to fall further over the next few months. It could easily be below 2% by the second quarter of 2024, aided by favourable base effects. Meanwhile, cooling wage growth should also help bring underlying inflation pressure down.


At the Bank of England’s (BoE) December meeting, there was a concerted effort to push back against recent market pricing for an earlier rate-cutting cycle. Indeed, the policy communication and voting pattern suggest the BoE wants to keep alive the possibility of further rate hikes. This signalling is not surprising as the combination of elevated wage growth and modest fiscal stimulus means policymakers are particularly sensitive to an easing in financial conditions. However, a ‘Table Mountain’ profile for rates is unlikely to prove sustainable, as headwinds mount and underlying inflation pressures fade. We expect rate cuts to start in June.

UK economic outlook

UK real estate market overview

While UK real estate capital values declined over the course of 2023, the pace of decline has moderated. There are tentative signs of stabilisation for some sectors but not all. There is a risk that further price discovery in the first half of 2024 will result in softer pricing, particularly for out-of-favour sectors. Performance has varied across sectors, with those benefiting from structural and thematic tailwinds proving more resilient in the face of a weaker macroeconomic environment. The logistics and living sectors are a clear example of this trend, both of which outperformed the wider market over the course of 2023.

UK real estate capital values fell by 2.6% in the fourth quarter of 2023. This resulted in value declines of 5.6% for the year, according to the MSCI Monthly Index. In line with our expectations, the living and logistics sectors outperformed the wider market, with capital value growth of 1.9% and 0.1% during 2023. The office sector remains the laggard. It recorded a capital decline of 16.6% over the same period, as the sector struggles with changing working habits, higher financing costs, and weak investor sentiment.

At the All-Property level, total returns for the calendar year 2023 were -0.1%. The largest negative contributor to performance was the office sector, which returned -11.9%. The residential sector was once again the strongest performing sector, returning 8.2%. The industrial sector returned 5.1% over the same period.

UK real estate investment volumes for the calendar year 2023 reached £34.3 billion, according to Real Capital Analytics. This represents a year-on-year decline of 47% and means that 2023 was the weakest year for investment activity since 2009. The investment market has been affected by a significant gap between buyer and seller aspirations across several sectors. The buyer pool for UK real estate was thin in 2023 and we expect this to be the case in the first half of 2024. While we expect greater liquidity to return to the market in 2024, this will be driven, in part, by buyer and seller expectations becoming more closely aligned. 

The UK real estate listed sector ended the year on a high, with the FTSE EPRA Nareit UK Index posting a total return of 18.9% in the final quarter of 2023. It significantly outperformed the FTSE All-Share Index, which recorded a total return of 3.2% over the same period. The recovery in UK REIT (real estate investment trust) performance in the fourth quarter of 2023 was driven by the market pricing-in an increased probability of rate cuts in the second half of 2024. This is mainly because of better inflation data and the expectation that peak rates have been reached. This was clearly illustrated by the UK interest rate swap market, with the five-year swap reaching lows of around 3.3% by the year-end. This was considerably lower than the peak of around 5.3% that was reached in July 2023. The UK listed real estate index has historically led the UK direct real estate sector by six-to-nine months, which adds weight to the argument that the that the fortunes for the latter will improve over the course of 2024.


Outlook for risk and performance

Monetary policy and the wider macroeconomic backdrop were in the driving seat in 2023 and we believe this will continue in 2024. Towards the end of 2023, market expectations for interest-rate cuts picked up pace (see chart 1), as underlying inflation pressures eased. Softer economic data added weight to the argument that the BoE’s ‘Table Mountain’ profile was unsustainable. Despite the outlook for monetary policy becoming more positive from this point, an improvement in UK real estate performance is not expected until the second half of 2024. The abrdn Global Macro Research team expects the BoE to begin its rate-cutting cycle at this point.

While the macro environment will continue to dominate as we move through 2024, sector allocation will remain crucial. Polarisation in performance from both a sector- and asset-quality perspective will remain a key differentiator for performance. Real estate refinancing poses a risk to our outlook in 2024. But we believe the risk is more heavily skewed towards offices, given the amount of outstanding debt and lack of appetite for lending in the sector.

A UK general election is mandated to occur no later than 28 January 2025. Ultimately, the prime minister decides on the date of the election, but a date in November 2024 looks most likely at this stage. The Labour party has opened-up a 20-point lead in the polls, relative to the Conservative party. At this stage, it appears likely there will be a change of government in the UK over the next 12 months.

With the increased prospect of interest-rate cuts in 2024, we expect an improvement in UK real estate performance as we move through 2024. This will be driven primarily by improved investor confidence and greater market liquidity. The downside risk to our forecasts remains elevated, given weaker economic growth prospects and the potential uncertainty created by the upcoming UK election.

UK total return forecasts from January 2024