Investor sentiment has been affected by conflict in the Middle East but too late to materially impact first-quarter commercial real estate activity in the UK, reports Lambert Smith Hampton.
LSH's UK Investment Transactions report, exclusively revealed by CoStar News, finds that investment volume in the first quarter reached £10.8 billion.
This was well below the record £21.6 billion recorded in the final quarter of 2025 but 16% higher than the first quarter last year and 13% below the five-year quarterly average.
Activity at the larger end of the market remained strong, with 11 deals above £200 million. The largest by some distance was Unite Group’s £723 million acquisition of Empiric Student Property. Other major acquisitions were Redical's £273 million purchase of the Merry Hill shopping centre in the West Midlands and Daibiru Corporation's acquisition of a majority stake in the long leasehold interest of Warwick Court in the City of London from Mitsubishi Estate for around £300 million.
Office volumes in the UK regions doubled quarter-on-quarter to £612 million, the highest since the fourth quarter of 2023 Q4 helped by several £50 million-plus transactions. The largest was BNY Mellon’s £114 million purchase of 4 Angel Square, Manchester, a net initial yield of 6.85%.
LSH says that although the outbreak of conflict in the Middle East at the end of February unsettled financial markets, transaction activity held up through the remainder of the quarter. The number of deals above £1 million was broadly in line with average levels and improved as the quarter progressed. March was the quarter’s strongest month for both deal count and volume, rising 11% and 31% respectively on February.
By sector, office investment proved the most resilient relative to the final quarter of 2025, with total volume of £3.1 billion, up 31% on the same period last year. Activity was driven primarily by overseas investors acquiring large central London assets, while the South East remained subdued.
Retail investment totalled £1.2 billion, which was 32% below trend and 35% lower than the final quarter last year.
Industrial and logistics activity also softened following a strong end to 2025, with the first quarter volume of £1.4 billion the lowest since the final quarter of 2023 and 55% below average. This was particularly evident in distribution warehouses, where volume of £507 million was the lowest in almost nine years. The first quarter’s largest deal, Chancerygate’s £155 million acquisition of the World Freight Terminal at Manchester Airport, was the second largest single-asset deal ever recorded in the regional multilet segment.
Overseas capital continued to play a major role, accounting for £5.1 billion, or close to half of total investment volume. However, against a backdrop of heightened geopolitical uncertainty, North American investment fell to a 10-quarter low of £2 billion, while European investment rose to a six-year high of £2.1 billion, surpassing North American inflows for the first time since 2019.
Domestic buying activity, by contrast, eased after a strong final quarter of 2025. Institutional investment totalled £1.1 billion, 29% below average, and the trend towards net selling resumed, with first quarter disposals reaching £1.3 billion. Quoted propco investment came in at £910 million, 18% below average, although this was boosted by Unite Group’s acquisition of Empiric Student Property.
LSH adds that while the conflict triggered volatility across financial markets, its effect on pricing was only partially evident by the end of the first quarter. The cross-sector average prime yield softened by eight basis points to 5.63%, reflecting 25 basis points outward movements for both regional offices and budget regional hotels, to 6.75% and 5.50% respectively. The All Property average transaction yield also moved out, albeit only marginally, by 2 basis points to 6.67%.
Ezra Nahome, CEO of Lambert Smith Hampton, said in a statement: “While the outbreak of conflict in the Middle East has clearly affected sentiment, it came too late in Q1 to materially influence the headline numbers, with March emerging as the busiest month of the quarter for transactions.
“It is still too early to know how events will unfold over the coming weeks. Even if a workable resolution is reached quickly, rising inflation, higher gilt yields and increased finance costs have altered the backdrop for 2026. Few are expecting a major downturn, but talk earlier in the year of yield compression now seems wide of the mark.
“That renewed uncertainty over pricing is likely to weigh on activity in Q2. Even so, I remain quietly confident that once stability returns, the market will recover momentum relatively quickly.
“And despite the volatility, UK property continues to offer compelling fundamentals. Recent global instability only reinforces the appeal of secure income-producing assets, while the UK stands to benefit from its position as a global safe haven. At the same time, constrained supply of high-quality space across the market should continue to support rental growth, even if occupier demand softens in a more challenging economic environment.”