Beit Capital: Momentum in UK real estate transactions

A report prepared by Bitam Capital, the investment arm of Kuwait Finance House, on the “UK Real Estate Market,” indicates that transaction volumes in the UK property market are expected to maintain their momentum in 2026, surpassing those recorded in 2025. The market experienced a strong recovery following interest rate hike cycles, with investment rates rising by 9%. The UK attracted investments worth £26.6 billion in the fourth quarter of 2025, marking the highest quarterly level ever recorded. The report also highlights that targeted real estate sectors are led by office spaces and student housing, alongside residential properties. The details of the report are as follows:

At the beginning of 2026, experts predicted that European real estate markets would enter a new cycle, with returns primarily linked to income. This is due to the continued rise in central banks’ base interest rates compared to the ultra-low interest rate environment that prevailed between the global financial crisis and the COVID-19 pandemic.

These expectations followed 2025, which was characterized by a sustained strong recovery after interest rate hikes. The market saw investments totaling €245.5 billion across Europe, with investment rates rising by 15% year-on-year in Europe and 9% in the UK. The UK recorded investments worth £26.6 billion in the fourth quarter of 2025, the highest quarterly level ever recorded. Transaction volumes in 2026 are expected to maintain their momentum and exceed those observed in 2025, driven by adjusted valuations, a narrowing gap between buyers and sellers, debt maturities, and portfolio turnover by institutional investors.

**Market Updates**

The US-Iranian war has resulted in a prolonged period of conflict in the Middle East, causing global interest rates to widen significantly due to inflationary concerns surrounding global oil supply chains. This has reversed any expectations of interest rate cuts and increased expectations for central banks to raise rates during a period of growing market volatility. The 3-month SONIA (Sterling Overnight Index Average) futures curve, which was expected to remain below 3.50% over the next 24 months, rose by 0.75%, reaching levels significantly above 4.00%.

**Expectations**

At the beginning of 2026, markets generally anticipated an easing cycle by the Bank of England due to falling inflation and a weak labor market, following its 25 basis point rate cut to 3.75% in December 2025. Meanwhile, the European Central Bank’s outlook was more neutral, considering inflation to be under control with expectations that the interest rate would remain at 2.0%.

**Impact on Real Estate**

Rising interest rates resulting from inflation have led to a slowdown in investment activity for the following reasons: increased borrowing costs for developers, which in turn reduces the total debt value of potential transactions; higher construction costs; and wider capitalization/yield rates used in valuation. The situation may worsen in the short term during periods of market volatility as investors adopt a “wait and see” approach.

Despite this, rising interest rates create opportunities for debt platforms with strong debt issuance skills, investment discipline, and risk structuring capabilities, allowing for periods of substantial returns.

The supply of office space has reached its lowest level since 2020. Many city center locations are suffering from a shortage of supply and low vacancy rates, particularly for Grade A offices. Administrative office jobs are also seeing annual growth.

Specialized student housing in the UK continues to face a supply shortage, exacerbated by increasing numbers of domestic and international students. English-taught programs across Europe remain in high demand, and this sector is expected to benefit from rising rental growth.

The residential sector remains the largest investment sector in Europe and is expected to remain the main driver of investment. Population growth and the resulting housing shortage are leading to a continuous increase in rents.

Eurozone GDP forecasts have been revised down by 0.4%, while UK consumer price index forecasts for 2026 have risen by 1.5% due to the ongoing conflict, leading to a 0.5% downward revision in GDP forecasts. Although UK inflation forecasts for 2027 have risen by 0.5%, GDP remains stable at 1.3%, indicating a limited impact on medium-to-long-term growth.

**Interest Rates**

By the end of 2025, market pricing reflected expectations that the Bank of England would cut interest rates by a total of 50 basis points during 2026 (two cuts of 25 basis points each), bringing the rate to 3.25%. However, since the escalation of tensions in the Middle East, expectations have shifted. Two 25 basis point rate hikes have replaced previous cut expectations, and traders now expect the Bank of England to close the year with a base interest rate of 4.25%.