Defence and AI will be the buzzwords in UK commercial real estate this year but prime shopping centres and prime regional offices will offer the best opportunity for income-driven returns.
Savills made the predictions at its UK Cross Sector Outlook presentation, taking in reviews of the commercial property, residential and rural markets.
Mat Oakley, head of Savills UK and European commercial research, said defence interested him most of the two new buzzwords, given the geopolitical dynamics driving demand from defence-related companies, particularly in the industrial sector.
"Data centres are essentially land rather than property deals. The hunger for land to meet capacity for data centres and AI is not going away but those frightened by obsolescence should stay away."
Oakley said in a market that will be characterised by income investors for the foreseeable future, his top picks lay elsewhere.
"The best opportunities are the double-digit-plus yields seen for prime malls or the 7%-plus yields for prime regional offices in a world where rental growth is strong and development supply very limited."
Oakley said 2025 had been a "remarkably unremarkable year" and more of the same could be expected in 2026 leading to a continuing gentle recovery for commercial property.
It had been another very good year for leasing markets but weak growth was impacting business confidence, he added. "Nevertheless, continued demand for prime commercial alongside very weak supply is going to start to bite."
The biggest change of recent times, Oakley says, is the intensifying focus on location. "I would have expected by now in the cycle to see more tenants prepared to look to more fringe locations for lower rents but we are seeing none of that. Investors should be buying the best location more than the best building."
Oakley warned that the issues with development viability are unlikely ease in 2026.
"For the next four or five years it will be all about income growth."
Revealing his New Year's resolution was to "be more honest", Oakley said there was unlikely to be much evidence of falling UK prime yields this year thanks to factors including the "lure of other asset classes".
"The opportunity to buy core prime stock at very attractive prices will not last."
The house view
The global broker reiterated its outlook for the average total return for the next five years for UK real estate to be 7.8% a year, up from its predicted 7.4% a year in 2025.
The international real estate adviser says that the UK’s outlook is more stable than it was a year ago and says commercial real estate volumes in 2026 are therefore likely to rise 10% from a projected £50 billion in 2025 to £55 billion.
Savills added that the importance of income in delivering real estate returns has risen across the board, primarily due to the expectation that the pace of interest rate tightening will slow and that the transmission of base rate cuts to the bond market will be slower than it expected in 2025.
Shopping centres and buy-to-let residential in Yorkshire and Humber come top of Savills' ranking for comparative returns for investors over the next five years.
Savills forecasts that income will make up the majority of returns on shopping centres, while buy-to-let residential in Yorkshire and Humber is more split between capital value growth and income return.
Lucien Cook, Savills' head of residential research, again forecast that the north of the UK will continue to deliver a better total return for residential investors than the south in the near future.
Cook is predicting house price growth of plus 0.6% this year. In the living sectors, single family housing will lead recovery in investment, while the multifamily sector will remained focused on existing developments. Student homes investors will be increasingly focused on supply and demand dynamics given the pressures on universities.
In the rural sector, Kelly Hewson-Fisher, head of UK rural research, said land will continue to perform well long term, offering steady capital increases year-on-year, and providing diversification in portfolios.
In total, 13 UK property sub-sectors are forecast to see annualised returns of more than 8% between 2026-2030 in the Savills outlook.
Richard Rees, UK managing director, said 2026 should be a better year for the real estate sectors, thanks to likely falling interest rates, continued price realisation in most sectors, and more confidence in the resilience of the UK.