By Fraser Williams, CEO – Morgan Pryce

Updated: 27 August 2025

 

In my last piece, I warned that gilts would be the weather vane for London commercial property—and that a sustained backup in risk-free rates would force a repricing while also creating selective opportunities. That call aged quickly. Over the past week, long-dated yields have punched up to cycle highs even as Bank Rate fell, tightening the financial conditions that matter for real estate. In other words: policy eased, markets didn’t. That’s exactly the kind of dislocation we prepare clients for.

 

What changed this month (and this week)

• Bank Rate: Cut 25 bps to 4.00% on 7 Aug after a razor-thin 5–4 vote; the Committee had to hold a second ballot for the first time since 1997. Markets now price at most one more cut over the next year.
• Inflation: CPI 3.8% y/y in July (up from 3.6%); services inflation remains sticky.
• Gilts: 10-year ~4.72–4.76% today; 30-year ~5.6%—near a 27-year high. That’s the highest long-end since 1998 and materially above early-summer levels.
• Front-end: 2-year gilt ~4.0%, keeping financing costs elevated for refis and development loans.
• Swaps (what lenders price off): GBP 5-year swap ~4.07% today; 5-year SONIA OIS ~3.85%—the forward curve says “higher for longer-ish.”
• BoE QT: The Bank estimates QT has added ~15–25 bps to 10-year yields; discussion is live about slowing QT if long yields stay disorderly.

 

Why this matters for property (the transmission mechanism)

1. Discount rates & cap rates: When the risk-free curve lifts, property required returns lift too. If a stabilized asset on a 5.0% cap reprices to 5.5%, the value multiple moves from 20× NOI to ~18.2×—a ~9% capital value hit with no change in income. A full +100 bps shift (5 → 6%) implies roughly −17%. That’s the mechanical part of the story; we saw it coming in our earlier note, and the gilt market has now delivered the stress test. (Illustrative math; inference from current yields.)
2. Debt costs & coverage: Despite the base-rate cut, 5-year swaps ~4.1% mean all-in fixed rates for CRE borrowing sit meaningfully above income yields on older, secondary stock. Interest cover is doing more heavy lifting than LTV for lenders’ credit committees right now.
3. Liquidity & bid-ask: Risk-averse capital can earn ~4.7–5.6% in gilts today with zero vacancy risk. That pulls some buyers to the sidelines and widens bid-ask spreads—especially on assets with capex, ESG or leasing risk.

 

What the tape says about London CRE right now

• Investment volumes: UK CRE investment £21.9bn in H1 2025; Q2 was £10bn, with Offices and Industrial taking share. Liquidity is back—but choosy.
• Prime yields: Recent evidence shows prime West End ~3.75% and City ~5.25–5.50% after the first inward movement in years during Q2. With the long end now higher, that compression is at risk of stalling—or reversing—unless rental growth surprises on the upside. (Forward view is ours; yield points from brokers.)
• Total returns backdrop: The MSCI Monthly Index showed solid 12-month total returns into early 2025, driven by income; capital growth has been modest and sector-skewed (industrial/retail stronger). That narrows your margin for error if discount rates climb again.

 

Sector-by-sector: the next 12–24 months

• Prime West End offices: With yields sub-4% and the 30-year gilt north of 5½%, the math is tight. Only best-in-class, green, small-floorplate assets with pricing power will defend values. Leasing risk or capex drag? Expect buyers to demand a fatter yield.
• City offices (core+ / value-add): At ~5.25–5.50% prime, the City offers a clearer spread to swaps—IF you underwrite realistic re-letting assumptions and capex for ESG compliance. This is where patient capital can win auctions when bid-ask blows out.
• Industrial & logistics: Fundamentals remain better—e-commerce, supply-chain resilience—but sector yields already compressed in 2020–22. If debt stays pricey, pricing power must come from rental growth and development discipline, not multiple expansion.
• Retail warehousing vs. discretionary high street: Retail sheds with strong grocer/DIY anchors and index-linked leases remain defensible. Discretionary high street still depends on micro-locations and lease re-gears to work at today’s discount rates. (Forward view based on inflation and yields.)

 

Policy & macro watchlist

• Inflation stickiness: July’s CPI 3.8% (services still 5.0% on CPI) keeps the BoE cautious. That’s why markets price only a shallow cutting path.
• MPC signalling: External members (e.g., Mann) are leaning “hold for longer” unless demand cracks—hardly a green light for rapid easing.
• QT pace: A formal slowdown would ease term premia at the margin; the Bank itself estimates QT has added 15–25 bps to 10-year yields. If QT is tapered, it buys the market some spread—but doesn’t fix inflation.

 

Scenarios we’re underwriting (12–24 months)

 

Base case (55%)

• Bank Rate ~3.75–4.00% by mid-2026; 10-year ~4.25–4.75%; 5-year swap ~3.6–4.1%.
• Implication: Cap-rate drift of +25–50 bps where rental growth is average or ESG capex is heavy; values −5% to −10% unless NOI outperforms. (Inferred from current curves and broker yields.)

 

Downside (25%)

• Inflation re-accelerates; BoE pauses, long end stays >5%; financing costs sticky.
• Implication: +75–100 bps to cap rates on secondary stock; values −12% to −18% on flat NOI; forced sellers appear in Q1–Q2 2026.

 

Upside (20%)

• Services inflation cools faster; BoE delivers two cuts into 2026; 10-year ~3.75–4.25%.
• Implication: Prime stabilises; selective inward yield moves on truly best-in-class assets; development pencil starts to sharpen again. (Conditional on inflation path; our view.)

 

What to do about it (the Morgan Pryce playbook)

• Lean into mis-priced spread: City core-plus with credible ESG capex and leasing catalysts at mid-5 yields can still clear debt costs and deliver equity IRRs—if bought right and hedged smartly.
• Prioritise income resilience: Short, flexible leases in high-velocity submarkets (certain West End micro-locations; peri-urban logistics) support re-pricing power if inflation proves sticky.
• Hedge duration, not just price: With 5-year swaps ~4.07%, consider layered hedges rather than binary fixes; structure matters more than ever when the forward curve is flat(-ish).
• Capex discipline: In a 5–6% long-end world, every pound of capex must either de-risk the cash flow or raise rent above market—preferably both. The market is no longer paying you for “nice to haves.”
• Be ready for Q4/Q1 windows: If QT slows or a data miss drags yields down 25–50 bps, sellers who anchored to today’s prints may accept yesterday’s bids. Keep IC memos pre-baked.

 

Linking back to our earlier guidance

In our prior article, we flagged three things: (1) rising gilts would lift cap rates; (2) liquidity would bifurcate between prime and “needs-work” stock; and (3) inflation would be the swing factor. Since then, the 30-year gilt has tested 27-year highs, CPI printed 3.8%, and the BoE cut into a bond-market sell-off—a rare, telling combo that validates our forward-planning stance. We’ll continue to help clients turn that foresight into better entry points and smarter capital stacks.