Q3 Macroeconomic Summary
Economic outlook for commercial property
The third quarter can be summarised fairly simply: Bank Rate hasn't moved, yet monetary conditions have tightened materially. For real estate, the implication is uncomfortable and unusually direct: the discount rate has risen without a single policy decision to justify it.
The cost of capital
This is the story that matters most for property. Five-year SONIA swaps, the benchmark against which most commercial property debt is priced, closed at 4.68% on 23 September. That is 68 basis points higher over the quarter and roughly 120 basis points above the February low. Ten-year gilts reached 5.37%, the highest borrowing cost in more than a quarter of a century. A borrower refinancing against a hedge struck a year ago faces around 90 basis points more on the reference rate alone, before any change in margin.
Above all, the market is not pricing a cycle. At no point over the next decade does the curve return to today's level, which suggests a structurally higher neutral rate, nearer 4% than 3%. Financial conditions are now tighter, with inflation at 3.1%, than they were at the end of the 2022-23 cycle, when inflation was more than double that.
Inflation and policy
CPI rose to 3.1% in August, but the detail argues for calm rather than alarm. Core held at 2.6% and services at 3.4%, so energy is doing the heavy lifting. The Bank expects headline inflation slightly above 4% in early 2027. That is uncomfortable, but it is something the Committee can look through, provided second-round effects stay contained. The early evidence is encouraging, with firms' pricing intentions at their lowest since 2022. The MPC still split six to three to hold at 3.75%, and markets now expect hikes in November and February.
Growth, jobs and the fiscal squeeze
GDP grew 0.4% in Q2, consistently beating forecasts. The growth is narrow, though. It is driven by business services and investment, while consumers participate only half-heartedly. Unemployment sits at 4.9%, and private-sector pay growth is at a six-year low.
The public finances are the bigger concern. Borrowing is running £8.1 billion above the OBR profile, and fiscal headroom has shrunk to around £12 billion. Most of that erosion came from higher yields. The loop is a familiar one: higher yields erode headroom, which forces tax rises, which weaken growth, which erodes headroom further. Property is exposed at both ends, through debt costs and through whatever the Budget does to transaction taxes.
“The public finances are the bigger concern. Borrowing is running £8.1 billion above the OBR profile, and fiscal headroom has shrunk to around £12 billion”
Outlook
The effects of the 28 October Budget are sadly predictable and should be assumed rather than hoped against. Transaction activity is likely to stall until November, as vendors and purchasers wait for clarity on property taxation and for debt markets to settle. Gilts will price the fiscal risk premium in advance, and that feeds straight into swap rates. Wider investment and hiring decisions will also be deferred.
September and October data are therefore likely to look weaker than the underlying position warrants. That softness shouldn't be read as structural deterioration. Some of the reluctance should unwind once the policy landscape is known, whatever the Red Box contains. With the OBR cast as the Grinch in this year's pantomime, is it too early to say: bah humbug?
Sources: Allsop Research, Autumn 2026 Market Conditions; ONS; Bank of England; OBR.
All figures correct at time of writing.
