26.6 billion pounds invested in UK real estate in the fourth quarter

“Bitek Capital”: Trading momentum continues this year despite Middle East developments and interest rate hikes

A report prepared by Bittek Capital, the investment arm of Kuwait Finance House, on the “UK Real Estate Market,” forecasts that trading volumes in the UK property market will maintain their momentum in 2026, exceeding those recorded in 2025. The market experienced a strong recovery following interest rate hiking cycles, with investment rates rising by 9%.

The report noted that the UK attracted investments worth £26.6 billion in the fourth quarter of 2025, marking the highest quarterly level ever recorded. It further highlighted that the targeted real estate sectors are led by office spaces and student housing, alongside residential properties. The following are the report’s details:

At the beginning of 2026, experts predicted that European real estate markets would enter a new cycle, where returns would be 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.

The report added that these expectations followed 2025, which was characterized by sustained strong recovery after interest rate hiking cycles. The market saw investments worth €245.5 billion across Europe, with investment rates rising by 15% year-on-year in Europe and 9% in the UK.

The UK also recorded investments worth £26.6 billion in the fourth quarter of 2025, the highest quarterly level ever recorded.

Trading volumes in 2026 are expected to maintain their momentum and exceed those recorded in 2025, driven by adjusted valuations, narrowing gaps between buyers and sellers, debt maturities, as well as portfolio rotation by institutional investors.

The report stated that the US-Iran 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 increasing market volatility. It noted that 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 a level significantly above 4.00%.

Previous Expectations

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

Impact on Real Estate

The report stated that rising interest rates resulting from inflation lead to a slowdown in investment activity for the following reasons: increased borrowing costs for developers, which in turn leads to a decrease in the total debt value of potential transactions; higher construction costs; and wider capitalization rates/returns 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 the foregoing, rising interest rates create opportunities for debt platforms that possess strong debt issuance capabilities, investment discipline, and risk structuring abilities, allowing for periods of substantial returns.

Office Spaces at Six-Year Low

Bitk Capital’s report indicated that the supply of office spaces has reached its lowest level since 2020. Many city center locations are experiencing a shortage of supply and declining vacancy rates, particularly for Grade A offices, while administrative office jobs are witnessing annual growth.

Specialized student housing in the United Kingdom continues to suffer from a supply shortage, a situation exacerbated by the increasing flow of both international and domestic 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 primary driver of investment. Growing populations and the resulting housing shortages are leading to a continuous increase in rents.

Outlook... European Real Estate Enters a New Cycle

While it is still too early to determine how recent geopolitical events in the Middle East will fully impact European real estate investment activity and performance in 2026, indicators confirm that rising inflation and restrictive banking policies will push many investors to adopt a more cautious approach, potentially delaying investment decisions until future clarity emerges and market sentiment improves. Forecasts issued earlier this year suggested that European real estate markets are entering a new cycle where returns will be primarily income-driven. Developers are likely to prioritize income-focused assets rather than relying on immediate capital gains from investment transactions.

Real estate debt investments are relatively benefiting from the high-interest-rate environment driven by inflationary pressures, due to the ability to generate increasing returns amid rising interest rates. Furthermore, real estate debt provides strong capital protection through lending secured by actual real estate assets, with growing capacity to shift toward safer sub-categories of real estate assets.

Rising Inflation and Lowered GDP Forecasts

GDP forecasts for the Eurozone were downgraded by 0.4%, while inflation forecasts for the UK’s Consumer Price Index for 2026 rose by 1.5% due to the ongoing conflict, leading to a 0.5% reduction in GDP forecasts. Although inflation forecasts for the UK in 2027 increased by 0.5%, GDP remained stable at 1.3%, indicating a limited impact on medium- and long-term growth.

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, stabilizing the interest rate at 3.25%.

However, since the escalation of tensions in the Middle East, expectations have shifted. Two interest rate hikes of 25 basis points each have replaced previous rate cut expectations, and traders now expect the Bank of England to close the year with a base interest rate of 4.25%.