Inflation-driven uncertainty weighs on UK property and investment outlook

The UK property market is entering 2026 on a more uncertain footing, as renewed inflationary pressure linked to the Iran conflict undermines expectations that the Bank of England will be able to cut interest rates later this year, according to a new sector analysis.

In its latest Real Estate Sector Update, Heligan Group said the combination of sticky inflation and geopolitical risk has significantly clouded the outlook for monetary policy, after earlier expectations of two rate cuts through 2026.

The Bank of England held interest rates at 3.75 per cent in March, but what had been viewed at the start of the year as a relatively clear easing cycle is now increasingly in doubt.

Inflation data shows the Consumer Prices Index rose to 3.3 per cent in March, up from 3.0 per cent in February, with energy-sensitive categories — particularly fuel — bearing the initial impact of higher global energy costs. Economists warn that further pass-through effects into transport, logistics and services could keep inflation elevated for longer.

Sam Lewis, Director, Debt Advisory at Heligan Group, said: “We had been seeing progress through the early part of the year.

“The Iran war has changed that calculus quite quickly, and developers who were making financing decisions on the assumption that rates would fall twice before year-end now need to revisit those plans.

“ A longer period of restrictive financing conditions was not what anyone was expecting six months ago.”

Against that backdrop, the housing market is showing signs of resilience but reduced momentum. Official figures place the average UK house price at around £268,000 in January 2026, up 1.3 per cent year-on-year, indicating a market that is stabilising rather than accelerating after stronger growth seen at the end of 2024.

Regional divergence remains pronounced. Northern Ireland continues to outperform, with annual price growth of 7.5 per cent in Q4 2025, while London has slipped further into negative territory, with prices down 1.7 per cent year-on-year by January 2026.

The report also highlights rising construction and development cost pressures, with industry commentary pointing to renewed inflation in energy-intensive materials such as bricks, cement and plasterboard — a trend linked to higher energy input costs.

Despite these headwinds, the living sectors remain a key source of strength. Average UK private rents reached £1,367 in January 2026, with rental inflation strongest in the North East, running at between 7.6 and 8.0 per cent. Analysts say continued supply constraints are sustaining rental growth even as broader housing demand softens.

In the purpose-built student accommodation (PBSA) market, institutional capital continues to flow selectively. In 2025, Maslow Capital provided a £500 million whole-loan facility to Fusion for five schemes across Birmingham, London, Loughborough, Glasgow and Cardiff, delivering more than 3,000 beds — a sign that debt remains available for high-quality, operationally robust assets.

Commercial property performance is increasingly polarised. Prime assets continue to outperform, with CBRE estimating City core rents rising 9.1 per cent in 2025 and West End core rents up 18.8 per cent, with further growth expected in 2026. Retail has also strengthened, with MSCI data showing total returns of 8.4 per cent in Q4 2025.

However, secondary assets continue to struggle as occupiers prioritise location, quality and ESG compliance, leaving older stock increasingly exposed to obsolescence risk.

Lewis, quoted in the report, said lenders remain active but increasingly selective in deployment. “The gap between credible and well-located schemes has widened considerably over the past few months,” he said, noting that capital is concentrating around higher-quality opportunities.

The report also highlights a shift in lending structures, with growing use of portfolio-level peak debt facilities and revolving credit arrangements as an alternative to single-asset financing.

Rather than assessing each project individually, lenders are increasingly sizing facilities based on peak aggregate borrowing, a trend that analysts say reflects both competition for strong borrowers and a more sophisticated approach to portfolio risk.

Despite near-term volatility, the report concludes that the long-term fundamentals of UK housing demand remain intact, underpinned by structural undersupply and policy focus. However, it warns that assumptions of stable macroeconomic conditions are increasingly unrealistic given recent global shocks.