Economic fragility has been intensified by the uncertainty related to US trade negotiations, though it is yet to be seen what impact this will have on private real estate markets – by Oliver Kummerfeldt

Despite this, we continue to see live opportunities across multiple sectors following extensive repricing, while occupier markets remain supported by tight supply conditions.

The recovery of the UK economy continues its fragile path, with the future trajectories of economic growth, inflation and interest rates, and the manifestation of ‘stagflationary’ risks, now also dependent on the outcome of trade negotiations with the US, following the introduction and subsequent suspension of tariffs in early April.

We note that there remains a great deal of uncertainty around the outcomes of current geopolitical events that has triggered significant market volatility, but we have yet to see any real impact on private European real estate markets, including the UK, at this stage. We are continuing to monitor the situation and how this may impact our investment and asset management activities, including the implementation of budgeted expenditure programs and occupier conditions across industries and sectors.

Economic backdrop

Over the first three months of the year, stagflationary risks have continued to increase for the UK economy. Inflation (CPI) rose sharply to 3% in January and has remained above target, though it did moderate to 2.8% in February and 2.6% in March. At the same time, official data shows the UK economy contracted by 0.1% month-on-month in January.

Conditions particularly in the manufacturing sector remain challenging. Global economic uncertainty, especially pertaining to tariffs, has weighed on manufacturers in recent months and the sector reported a sharp decline across output and new orders in March. Conditions in the service sector remained somewhat more positive. However, retailers have noted softer demand in recent months, with consumer sentiment remaining in negative territory and the household savings rate reaching 12% in Q4’24, its highest on record excluding the pandemic. This possibly indicates that despite lower inflation and still reasonably robust (yet weakening) labour markets, consumers are turning increasingly cautious.

The seismic shift in US trade policy and the significant increase in tariffs caused strong reactions in financial markets and further raised uncertainties about growth, inflation and interest rates across the world. The UK was not hit by any extra tariffs on top of the 10% baseline tariff imposed by the US administration. The economic impact on the UK economy will depend on the outcome of any retaliatory measures, deal negotiations, their timing, and any support from the government. Recent remarks from the UK government suggest the focus is on deal negotiation rather than retaliation, which could suggest weaker growth and disinflation. UK GDP growth forecasts had already successively been revised down since the start of the year, with the consensus forecast for 2025 GDP growth at 0.7% in April compared to 1.3% in December 2024.

The Bank of England’s (BoE) Monetary Policy Committee (MPC) opted for another 25bps interest rate cut in February, bringing the bank rate to 4.5%. However, following the US tariff announcements, financial markets have increased their expectations of BoE rate cuts this year, with markets now anticipating the base rate to be cut to 3.75% by the end of 2025. Five-year GBP swap rates also declined to 4.03% (as at 16 April) from 4.56% at the recent January peak, which will be supportive to real estate financing activities.

UK real estate market

The current situation remains fluid and any increased US tariffs will take time to ripple through into the data in terms of trade flows, inflationary or rate consequences, broader economic activity, and, ultimately, the operational and financial performance of real estate. However, it should be noted that UK real estate capital values have already experienced a period of significant adjustment and, as such, we still view there to be a live cyclical opportunity.

As a reminder,  the MSCI UK Monthly Index recorded a capital value decline of ~25% between June 2022 and July 2024. Since then, values have shown steady monthly increases, with average capital growth of 2.5% from the trough to March 2025, supported by yield compression and modest rental growth. While the impacts to real estate investor sentiment and activity may choke-off or delay this recovery, we view there to be a limit on how much private UK real estate markets could potentially fall further or again depending upon segment, given the UK has seen one of the largest corrections globally.

According to our proprietary market valuation framework, immediate opportunities remain available across multiple sectors. Several property types, notably the industrial and logistics segments, have rebased to attractive price points, and are supported by strong structural fundamentals. Upcoming refinancings will drive asset disposals, as will anticipated sales from corporate defined benefit pension schemes as they continue to de-risk. Our latest forecasts for the MSCI UK Annual Index show average commercial real estate total returns in 2025 and 2026 at 9-10% p.a., and 8-9% p.a. thereafter in 2027 and 2028, representing above average rates. Clearly the downside risks to these forecasts have risen, which we will monitor closely.

High levels of uncertainty and lower growth is likely to impact occupier sentiment demand and could trigger rising delinquencies for weaker businesses that are already exposed to wage and energy price appreciation, or lower consumer spending. Business spending will also likely be subdued and businesses will likely defer decision-making. However, occupier markets remain supported by tight supply conditions. Modern, high-quality space is already scarce and this dynamic could be exacerbated by further elevated construction costs, as raw material prices will likely act to curtail new supply further, which in turn should support rental levels and future rental growth.

Over the short-term we expect curtailed investment activity and demand as the macroeconomic situation is digested and potential portfolio denominator effects filter through. This would mean that the recovery seen in transaction volumes, particularly in the last quarter of 2024 in which c.£15.4 billion was invested, will not continue as previously anticipated. While investor intention surveys show growing interest in UK real estate and our local UK investment team has been observing broader sources of capital showing firm interest in repriced UK opportunities, volumes in Q1’25 totalled only £6.9 billion according to preliminary figures in early April from MSCI RCA, representing a drop of c.40% compared to Q1’24.

Investment outlook

Regarding our current asset views, our preferred sectors and portfolio positioning remain largely unchanged, but we have shifted to a more neutral stance across market segments. This is attributable to our expectations for income growth already reflecting a challenging economic environment and market repricing progressing, especially in terms of sector ordering.

To that end we continue to favour industrial estates (including outdoor storage facilities), cross-dock warehouses, and urban logistics assets benefitting from e-commerce and urbanisation trends. We believe that the current trade situation is likely to accelerate nearshoring dynamics – even if tariffs might prove to be short-lived. This form of supply chain reorganisation will create winners and losers. Gateway locations and areas particularly dependent on (US-)exports could, however, see a short-term decline in demand.

The retail sector seems to have found a floor, though the risk to consumer confidence and margin pressure for retailers mean we continue to favour retail parks with a low exposure to fashion that attract discount and mid-market retailers, as well as convenience formats including supermarkets. In the office sector, we remain selective and focused on well-located high-quality offices with sustainability certifications¹ in London, as well as other major regional and knowledge-based cities. There is also a strong occupier preference for high-quality space in all major central business districts (CBDs), which is scarce and where the imbalance between expected limited future supply and growing demand will further exacerbate this dynamic. We see potentially mis-priced opportunities to execute upgrades and refurbishments of well-located workspaces.

As UK real estate portfolio allocations evolve away from the “traditional” sectors, we are focusing on more operationally intensive real estate segments able to provide, at a minimum, inflation-linked cashflows. These can be delivered both directly and indirectly, with outsized income growth potential aligned to the success of the business activities taking place within the properties. This includes self-storage, which is benefitting from the growth in household formation and e-commerce, as well as representing an attractive consolidation opportunity. We see notable opportunities to create these formats by converting and repurposing existing assets into higher-value alternative use. Living and ‘social infrastructure’² segments such as doctors’ surgeries are providing long-term resilient cashflows and are to a certain extent driven by longer-term demographic trends and less by economic cycles.

We are observing an ever-increasing opportunity for private capital to fund the development of affordable and social housing³ formats that can subsequently provide contractual inflation-linked income and positive impact attributes. This strategy is set to benefit from strong government policy support and could potentially see a further increase in demand if a prolonged period of economic weakness starts to affect more and more households.

Schroders has expressed its own views and opinions in this document, and these may change. Information herein is believed to be reliable, but Schroders does not warrant its completeness or accuracy. The views and opinions contained herein are those of the author’s, or the individual to whom they are attributed, and may not necessarily represent views expressed or reflected in other communications, strategies or funds.

¹Sustainability certifications are accreditations which assess sustainability credentials of buildings, for example BREEAM.

²In this context only, we are defining social infrastructure as healthcare, employment opportunities, education and training.

³As defined in Annex 2 of the National Planning Policy Framework or any subsequent regulatory definitions, as well as specialist housing, sheltered housing and other forms of housing for residents facing homelessness or other crisis situations, whether regulated or otherwise.