An expected modest recovery in transactional activity and prices for UK commercial recovery this year has been revised by Savills in the face of the outbreak of war in Iran and domestic political uncertainty.
Speaking at Savills' 38th annual Financing Property presentation this morning, head of UK and European commercial research Mat Oakley said the adviser had changed its forecasts from a 10% increase in transactions and a 25 basis points hardening in yields before the Iran war started, to a 5% growth in activity and no yield hardening during 2026.
Savills put last year's investment activity at £56.8 billion, while investment in the first quarter of 2026 was £10.4 billion.
Oakley based the revised forecast on Savills' line of sight into the level of assets under offer, which has improved slightly over the course of the year on last year. He said: “While fundamentals remain strong, confidence will continue to be a challenge for both the occupational and investment markets. We do foresee increased levels, particularly from more income investors, compared to traditional cyclical players – although it is important to note that the opportunity to buy core at value-add prices will not last.”
"[I]t is important to note that the opportunity to buy core at value-add prices will not last."
The presentation, which played out again to a packed house at the Merchant Taylors' Hall in the City, despite London Underground strikes, found that the debt market remains strong, but it is becoming more selective. There are still attractive opportunities for borrowers to secure debt, but while margins still matter, sophisticated borrowers are increasingly focused on the overall structure of a debt package. Savills said debt remains competitive, but structure is becoming as important as price to borrowers when piecing together deals.
Nick Harris, Savills head of UK and cross border valuation, explained: “Over the course of last year and into this year the debt market was exceptionally competitive, driving margins for some assets to levels we haven’t seen for some time. One of the most important trends is that the market conversation has moved beyond simple margin comparison, demonstrated by increased covenant and hedging flexibility.”
Harris said deals were being structured with more covenant flexibility as well as lower hedging percentages or rolling hedge facilities. There was also more flexibility on repayment fees and evidence of deals being structured based on special purpose vehicle valuations, rather than that of the assets. He said lenders were keeping a watch on the abolition of upward-only rent reviews, which was making income resilience more central.
Lending appetite
Overall lending appetite remains strong, with Savills referring to the latest Bayes survey, which shows lending up 29% year-on-year with 40% supporting new acquisitions and 60% for refinancing. Bank lenders have continued to dominate overall, accounting for 62% of new lending against 38% from non-bank lending.
Savills said the conflict in the Middle East has resulted in some disruption with the anticipated impact of increased energy prices on interest rates and further rises in swap rates, which are linked to a rise in the cost of debt. Harris said not all lenders have responded in the same way with some quickly becoming more cautious, particularly around underwriting or distribution risk, while others have continued with business as usual. He added the UK remains the deepest and most diverse lending market in Europe with significantly more active lenders than any other European market.
Harris said: “There are clear headwinds from the evolving geopolitical backdrop, its impact on the trajectory of the UK economy and, in turn, interest rate expectations. However, success in this phase of the cycle comes down to strategy – how disruption is managed, how downside risk is mitigated and how income resilience is maintained. For lenders, backing the right sponsors and maintaining discipline on execution is key and, for borrowers, it is crucial to bring forward opportunities that are robust, well-structured and able to withstand greater scrutiny. Ultimately, those who approach the market with clarity, discipline and a long-term outlook will be best placed to succeed.”
Commercial real estate struggling to have lift-off
Oakley said in terms of the broad UK commercial property market it remained the "dull CRE market we have seen for the last three or so years" on many levels, something that was "not a problem" necessarily. "With projected 0.4% GDP growth though it is difficult to see a surge in occupier demand."
Oakley added: "This is one of the longest periods where prime yields have been flat and some investors like volatility. There is not enough competitive tension in terms of the number of buyers and not enough levels of distress for this."
"This is one of the longest periods where prime yields have been flat and some investors like volatility. There is not enough competitive tension in terms of the number of buyers and not enough levels of distress for this."
Oakley said the number of under-offers and opportunities brought out for sale in April and May was up on the same period last year and on the long-term average, which suggested there was an opportunity to do deals. "The occupier fundamentals are pretty solid, with strong demand for core and prime in all sectors and development remaining low which is leading to upward pressure on rents in prime in most areas, particularly central London offices."
Oakley did point to some areas where rents were cooling, such as London urban logistics, as well as retail warehouses where this was a factor mainly of a lack of supply and evidence of rents being paid.
Oakley said the principal problem for the market is returns from real estate are "not quite good enough" compared with gilts for less risk-averse investors and equities for investors at the other end of the spectrum.
Oakley added that "the good news is we are getting better at shocks but the problem is weak confidence" from business and consumers.
Residential facing regulatory struggle
In the residential sector, Savills highlighted that while the mainstream market is in a more robust position to adapt to the recent shift in affordability than it was in 2022, reduced demand is expected to place downward pressure on prices. The firm’s latest forecast points to a modest short-term decline in UK house prices this year, with capacity for growth remaining in the medium term.
Emily Williams, residential research director at Savills, said: “While caution is likely to dominate the mainstream housing market in 2026, there are some interesting movements in other areas of the market around policy changes, particularly the taxation of high value property and rental regulation that will see these sectors going through some fundamental structural shifts. For the Built to Rent market, the case for institutional investment continues to gather momentum, although viability pressures pose an increasing challenge to development.”