Market Conditions
The first quarter of 2026 has been one of surprising extremes, akin to the famously variable British spring weather. Bright spots appeared early, with slowing inflation and the after-effects of the rate cut in December combining to ‘warm up’ the real estate market across all sectors.
However cold winds suddenly appeared in March, blowing away both the first draft of this commentary and the optimism with which the New Year had begun.
There are now far more clouds in our sky than any of us were expecting and the likely after-effects of recent events in the Middle East are set to be profound for the property sector, especially given the fact Britain was already wearing ‘the wrong coat’ for this type of stormy macro-weather!
“It was one of those March days when the sun shines hot and the wind blows cold: when it is summer in the light, and winter in the shade.”
Charles Dickens Great Expectations
Allsop Outlook
Firstly, the cumulative effect of higher employment costs was already creating a challenging environment for certain sectors:
- Residential landlords employing managing agents, maintenance contractors, and administrative staff were likely to face higher labour costs.
- Developers and construction firms, already navigating viability challenges, will face increased costs for directly employed workers and subcontractors. The sharp fall in Construction output in January and major housebuilder Berkeley PLC announcing a pause in both hiring and land acquisition, clear evidence of the scale of the challenge facing this segment of the market.
- Retailers and hospitality operators occupying commercial property were looking at margin compression, for which the traditional remedy has long been store closures, lease surrenders and headcount reductions; and/or consumer price rises where possible.
Secondly, sluggish economic growth, both historic and projected, had been lurking on our horizon for some time.
- An economy growing at 0% to 1% generally provides weak support for occupier demand across all asset classes: retailers inevitably face weaker consumer spending, office occupiers face more uncertain headcount growth, and residential buyers face both income uncertainty and affordability constraints.
The combination of weak growth, elevated borrowing costs, and rising energy bills was already creating a challenging backdrop for property values, transaction volumes, and development activity well before the Iran conflict broke out. But this storm cloud was at least predictable and a known quantity which markets could prepare for.
Thirdly the labour market data reveals a troubling long-term trend: a significant exodus of British nationals from the UK.
- The ONS's revised migration methodology shows British nationals leaving the UK at an average rate of 92,000 per year between 2021 and 2024-dramatically higher than the previous estimate of just 6,500 per year under the old methodology. While some of this reflects improved measurement rather than a genuine change in behaviour, the scale of the revision suggests a substantial and sustained outflow of UK citizens.
- Evidence from Companies House reinforces concerns about capital and talent flight among higher-net-worth individuals. Data on company directors shows a marked increase in re-domiciliation abroad, with directors changing registered addresses to overseas jurisdictions at elevated rates through 2024 and 2025.
- Wealth migration consultancies and banks in recent months anecdotally reported record levels of enquiries from UK-based high-net-worth individuals exploring relocation, driven by concerns about tax policy, regulatory burden, and the broader economic and political environment. The direction of some of those enquiries ‘reversed’ as soon as the scale of the Iran-USA/Israel military action became clear in March, with some HNWIs contemplating using the UK as a safe haven, but these enquiries were not at the scale of the sustained outflow we’ve seen in recent years.
An exodus of affluent individuals has direct implications for the prime London residential market, where demand is heavily dependent on internationally mobile high-net-worth buyers and tenants.
At the same time high unemployment (especially youth unemployment), falling job vacancies and negligible real wage growth imply that the engine of the UK economy is running low on fuel. Rental and mortgage affordability concerns, as a well as a new cost-of-living crisis, could resurrect themselves as factors late in 2026 and into 2027 if the geopolitical and trade situations persist or worsen.
The implications of the renewed instability in the global financial markets are also now becoming painfully clear: financing costs will - barring a sudden and lasting Middle Eastern peace deal - remain structurally higher, requiring a repricing of yields and investment returns over the rest of 2026.
We have already seen the impact of this, with buyers on transactions in March facing near-overnight increases in their debt costs of ~100bps at best, or at worst, a sudden withdrawal of lender appetite.
Average 2yr & 5yr mortgage rates - Jan 2022 to Mar 2026
Source: Moneyfacts ¦ as at 25th March 2026 Source URL
In the domestic mortgage market, we’ve seen a similar phenomenon play out, albeit at a larger scale.
- Analysts Moneyfacts estimate that lenders withdrew more than 1,500 mortgage products in the 3 weeks between 9 March and 25 March, equating to roughly a fifth of the overall mortgage market. On one day (21 March) 448 mortgage deals were withdrawn which is the highest amount in a single day since the aftermath of the September 2022 minibudget.
- First-time buyers have seen the average two-year fixed rate at 95% loan-to-value (LTV) jump back above 6% and more than 200 deals at the 95% LTV tier being withdrawn in March. This added more than £1,000 p.a. to the cost of a £250,000 loan at 95% LTV in just 3 weeks.
All this will weigh negatively on the new build and apartment markets, reducing the demand pool for housebuilders’ stock and smaller ‘starter’ homes, hurting viability as buyer confidence falls, with builders and conventional vendors having to cut prices or increase the levels of incentives to keep sales rates moving.
“Recent years have seen an unprecedented increase in cost and regulation, at a time of increasing interest rates and faltering consumer confidence, amidst prolonged geopolitical and macro-economic volatility and uncertainty…In the first two months of 2026, we had begun to see signs of a modest recovery in sales volumes. However, recent geopolitical events and the macroeconomic consequences, including reduced potential for further rate cuts, could reduce confidence in a near-term market recovery. This has now become a reality.”
Berkeley Group Strategy and Trading Update ¦ 1st April 2026 Source URL
The energy price shock now working its way through the system will add materially to consumer price inflation through Q2 and Q3 2026. The MPC's own March projections projected CPI to approximately 3.5% in Q3 2026, with energy increases contributing ~0.75 percentage points. Although I suspect that forecast will be revised upwards once the scale of the damage and disruption to petrochemical infrastructure, and trade, becomes fully clear.
Private sector inflation estimates have already adjusted above the BoE’s number: Experian's full-year 2026 inflation forecast is now 4.3% thanks to rising fuel prices and the July energy cap reset. Household inflation expectations also jumped to 5.4% in March from 3.3% in February, raising the spectre of a wage-price spiral as both public and private sector workers seek higher pay settlements to offset the increase in CPI.
The worry, from a monetary policy perspective, is that the ~2month lag in the ONS CPI means that the Bank won’t be working with ‘live data’ that is reflecting higher input prices as a result of the closure of the Strait of Hormuz, until the MPC meet on 18 June at the earliest (they don’t meet in May) or on 30 July at worst.
By late July, the new OFGEM price cap plus price rises caused by Hormuz-linked supply shortages AND employers’ responses to April’s increases in employment costs will likely be feeding through to the ONS consumer price data. And that pass through might be rapid and involve a large upward ‘jump’ that could nudge the MPC into a Summer rate rise. We couldalso be using the word Stagflation a lot more by then.
I hope not of course, but who knows at this point!?
Fundamentally we have just seen a shift in financing conditions faster than at any point since 2008, but further clouds are below the horizon racing towards us.
This is not yet a crisis, but the margins for error (and profit) have narrowed dramatically and suddenly across all sectors.
The only forecast I can confidently offer at the end of March is that conditions look set to be highly variable - mostly cloudy and showery with only isolated sunny intervals - for the foreseeable future.
The Hormuz Situation - Possible Scenarios
On 28 February 2026, US-Israeli Operation Epic Fury struck Iran, killing Supreme Leader Ayatollah Khamenei. Iran retaliated by effectively closing the Strait of Hormuz from 2 March, something it had threatened for 45 years but never previously achieved.
The Strait carries approximately:
- 20% of global oil supply (~20 million barrels/day)
- 22% of global LNG exports
- Roughly one third of the world's seaborne fertiliser trade
- Roughly one third of the world's helium supply (critical for semiconductor production)
- Approx. 11% of total maritime trade volume
There appears to be broadly two scenarios that could now play out, as of the end of March 2026:
SCENARIO 1: QUICK RESOLUTION
A rapid diplomatic or military ‘end’ to the conflict, with no more major damage to critical infrastructure in the region. The Strait of Hormuz reopens within 6-8 weeks, i.e. before June 2026.
SCENARIO 2: PROLONGED DISRUPTION
The conflict becomes prolonged and more industrial infrastructure is dealt lasting damage. The Strait of Hormuz remains closed/severely disrupted well into H2 2026 and perhaps beyond.
1. SUPPLY CHAIN DISRUPTION
Even with rapid resolution, 5-6 weeks of effective closure has already caused:
- Cascading schedule delays across global shipping networks
- Disruptions extending beyond 4 weeks generate "disproportionately larger effects" as delays accumulate
- Over 200 ships stranded: helium containers losing value as liquid warms and escapes
- Fertiliser prices already up 40%+ (urea); Northern Hemisphere planting season affected
- Qatar's helium facilities damaged - even if Strait reopens, market normalisation could take 2+ months due to specialised cryogenic containers (Pulsar Helium CEO)
- 46,000+ flight cancellations across Asia-Europe routes due to fuel shortages/cost increases
- OIL: Approximately 20 million barrels/day of supply disrupted - far exceeding the 1973 embargo (4.4 million bpd) or 1979 Iranian Revolution (4.8 million bpd)
- LNG: ~20% of global LNG supply removed from market. Qatar's Ras Laffan complex (1/6 of global LNG supply) damaged by strikes. Force majeure declared on Qatari LNG shipments
- FERTILISERS: ~33% of world's seaborne fertiliser trade passes through Strait. Urea prices already up 40%+ ($683/metric ton). Gulf exports include 5 million tonnes of urea yearly from Qatar/Iran, 2 million each from UAE/Saudi Arabia. Impact on Northern Hemisphere food production could be severe.
- HELIUM: ~33% of world's helium supply from Qatar, transiting the Strait. Critical for semiconductor manufacturing, MRI machines, space technology. Production halted due to infrastructure damage. Even if Strait reopens, full restoration could take YEARS.
- SHIPPING: Container shipping lines (Maersk, MSC) suspended transits. US import rates up 30-50%. Petrochemical run-rates in South Korea/Japan cut 50%. 6,000+ vessels detained
- FOOD PRICES: Fertiliser shortages + higher diesel costs = reduced crop yields. "Third wave" of effects will elevate global food prices. Brazil and India most vulnerable.
2. FINANCIAL MARKET IMPLICATIONS
- GILT YIELDS: Could ease from current ~4.7-5.0% back toward 4.3-4.5% within weeks of confirmed resolution. Some fixed income managers already view current levels as "potentially attractive" if energy stabilises
- SWAP RATES: Moderate probability of 5-year SONIA swaps pulling back from ~4.25% toward ~3.7-3.8% within 6-8 weeks if oil falls to $75-80/barrel
- MORTGAGE MARKET: Products would likely be restored relatively quickly. British banks could respond pre-emptively to expected rate changes. However, the ~1,000 products already pulled would take weeks to reprice and relaunch
- TIMELINE ESTIMATE: 4-8 weeks from a confirmed resolution to meaningful mortgage market normalisation with 2-3 months for elevated swap rates to fully unwind.
- GILT YIELDS: 10-year gilt already at 5.0% (highest since 2008). In prolonged scenario, could reach 5.5%+, well above the 2022 mini-budget crisis levels. 30-year gilt already at 5.45%.
- SWAP RATES: 5-year SONIA swaps could reach 4.5-5.0% in prolonged scenario. Late March levels already at 4.35-4.48% for 2-5 year tenors.
- MORTGAGE RATES: Average 2-year fixed already at 5.01-5.51%. In prolonged scenario, could reach 5.5-6.0%+. Sub-4% deals would disappear entirely.
- EQUITY MARKETS: Gulf equity markets down 15-35% from pre-war levels. S&P 500 declined 2-2.1%. UK REIT market retreating to defensive sectors.
3. IMPACT ON INFLATION
- OIL: Could fall toward $75-80/barrel within 8 weeks of resolution, but unlikely to return to pre-conflict $72 due to infrastructure damage and risk premium
- GAS: European TTF would ease but remain elevated - EU gas storage at only 46 bcm (vs 60 bcm in 2025, 77 bcm in 2024). Refilling for winter 2026/27 will keep prices above pre-conflict levels
- JULY OFGEM CAP: WILL STILL RISE even in quick resolution scenario. Currently forecast at £1,920-1,973/year (up £280-332 from April's £1,641). The cap is calculated using 3-month wholesale price averaging - the March spike is therefore already "baked in." The July cap will be calculated by 27 May based on early April market data.
- CPI TRAJECTORY: Q2 2026 ~3.0%; Q3 could still reach 3.0-3.2% due to lagged energy cap effects, but would fall back toward 2.5% by Q4 and potentially reach 2% target by mid-2027
- Q2 2026: CPI ~3.0% (BoE March projection)
- Q3 2026: CPI 3.0-3.5% (BoE projects energy adding ~0.75pp directly)
- JULY OFGEM CAP: £1,920-1,973 (up £280-332 from April) - KPMG now anticipates peak "above 3.5%"
- Q4 2026: CPI 2.6-2.7% if oil stabilises
- Oct’26 OFGEM CAP: forecast at £2,016-2,047 (up £375-406 from April), but if Strait remains closed, could be significantly higher
- 2027: Return to 2% target DELAYED by nearly a year vs pre-conflict forecast e,g, BCC forecasts 1.9% by 2027 (previously expected mid-2026)
- HOUSEHOLD INFLATION EXPECTATIONS: jumped to 5.4% in March from 3.3% in February - risking wage-price spiral
4. BoE MONETARY POLICY RESPONSE
RATE CUTS could resume by August/September 2026 if inflation trajectory improves
- MORNINGSTAR economist Grant Slade expects zero hikes and one cut in late 2026; assuming inflation returns to 2% target by year-end
- UBS expects next move to be a CUT rather than hike, though delayed until
- J.P. MORGAN sees just one hike in June 2026 after Bailey signalled markets were being "overly aggressive" in pricing multiple hikes
- MARKETS begin to price 3-4 rate hikes (April, June, July, September) totalling ~75-100bps, taking Bank Rate to 4.50-4.75% by Q4 2026
"Markets think the Bank of England will raise base rates by about 75bp this year, a volte-face from the 50bp of rate cuts priced in at the start of this year" - Deloitte
- THE BOE FACES A CLASSIC STAGFLATION DILEMMA: monetary policy cannot offset global energy prices but must anchor expectations to hit the 2% CPI target
- KEY DISTINCTION FROM 2022: Unlike 2022's demand-resilient inflation, 2026 features supply shocks colliding with fragile demand.
5. IMPACT ON GROWTH
Recession likely AVOIDED in quick resolution scenario
- Short disruptions of 2 weeks or less have limited consequences - but at 5-6 weeks, we're already in the zone of "disproportionately larger effects"
- US relatively well-placed due to energy self-sufficiency; Asia most exposed; Europe: somewhere in between
- Key risk: even quick resolution doesn't undo the confidence shock or the repricing of geopolitical risk that has already occurred
- MORGAN STANLEY warning of a "pronounced UK recession at the turn of the year" (late 2026) if energy costs stay high
- PANMURE LIBERUM sees recession as a "real possibility" in H2 2026
- RECESSION probability estimates range from ~30% chance to +50% depending on oil price duration.
Persistent $100+/barrel oil + base rate hikes = high probability.
- GDP growth already near zero (Q1 estimates at 0.1-0.2%)
- UNEMPLOYMENT already at 5.2% and rising
- OBR had already cut 2026 growth forecast to 1.1% BEFORE the conflict - extended disruption and heightened cost inflation makes a formal recession appear inevitable.
6. HISTORIC PARALLELS
- 1990 GULF WAR: Oil spiked from $17 to $41/barrel (Aug-Oct 1990) but fell back to $20 within months of resolution.
- However, the UK still entered recession in 1990-91 (though this was driven by multiple factors including high interest rates and the ERM crisis)
- KEY DIFFERENCE: The 1990 shock was shorter and less severe than the current Hormuz closure.
The IEA describes the current situation as: "the gravest energy shock of all time” - Fatih Birol, IEA Executive Director
"History shows oil shocks are followed by recessions - will it be any different this time?" - Irish Times, 28 March 2026
Source: irishtimes.com/opinion/2026/03/28
- 1973 OPEC EMBARGO: Oil quadrupled ($2.90 → $11.65). World income growth fell from 6% to 1.4%. World trade contracted 7.3%. US recession Nov 1973 to March 1975.
- 1979 IRANIAN REVOLUTION: Oil doubled ($15 → $39). Volcker's Fed hiked to 20%. Double-dip recession. Unemployment reached 10.8%.
- CURRENT DISRUPTION: 20 million bpd disrupted - FAR exceeding both 1973 (4.4 million bpd) and 1979 (4.8 million bpd)
- ALLIANZ ESTIMATES: Global GDP +2.6% (down 0.5pp from baseline), inflation up (US 3.2%, Eurozone 3.0%), trade growth just 1.5%
Source: allianz.com/en/economic_research
- PROLONGED SCENARIO: Up to $2.2 TRILLION in global GDP losses (2-3% of global GDP). Gulf economies face GDP declines of ~22%.
- MITIGATING FACTOR: Modern economies use same oil volume despite 4x GDP growth since 1973, reducing vulnerability. But the SCALE of this disruption is unprecedented.
POTENTIAL IMPACT ON UK REAL ESTATE MARKETS:
SCENARIO 1: QUICK RESOLUTION
- Residential Transaction market could recover relatively quickly IF mortgage products are restored and swap rates normalise do anything like their February levels.
- Pre-conflict momentum was positive: February 2026 saw highest number of new house listings in a decade; sales at decade-high levels
BUT:
- The Renters' Rights Act (1 May 2026) implementation proceeds regardless, adding regulatory uncertainty on top of geopolitical uncertainty
- Landlord sell-off may actually ACCELERATE as some use the conflict as additional motivation to exit before 1 May.
"Needs-based sectors like residential are likely to be relatively insulated. Equally, assets on long leases are less exposed"
L&G
SCENARIO 2: PROLONGED DISRUPTION
A. RESIDENTIAL TRANSACTIONS:
- UK Finance already forecast 1% decline in transactions for 2026 (1.20M vs 1.21M in 2025) BEFORE the conflict
- Nearly 1,000 mortgage products pulled since conflict began
- Average borrowing costs up ~£900/year on a £250,000 mortgage
- 1.8 million fixed-rate mortgages expiring in 2026 - borrowers face significantly higher rates at renewal
- Pre-conflict momentum (0.8% house price growth in March, rising loan approvals) has stalled
B. PRICES:
- Resurgent inflation would feed through into a higher cost of money, which would put upward pressure on property yields. At the same time, a hit to the wider economy from higher energy costs and inflation could dampen occupier demand.
- London faces heightened risk of domestic-driven price falls
- Short-term price pressure especially on higher-end properties (£500k+)
BUT:
- Supply shortages may provide a floor. UK housing undersupply is structural.
- Prime markets could also receive a demand bump from either/both HNWI outflows reversing away from the conflict zone and Middle Eastern capital & individuals seeking a safe haven.
C. DEVELOPMENT VIABILITY
- Construction costs rising through higher energy prices (bricks, cement, glass, asphalt, insulation all energy-intensive)
- Lead times extending for steel, aluminium, M&E equipment
- UK construction output already in fourth consecutive 3-month decline
- Elevated risk of delays, cancellations, and insolvencies - especially private housing and commercial schemes
D. REFINANCING RISKS
- £30Bn+ of CRE loans due for refinancing in 2026
- Legacy low-cost debt (originated 2020-21 at sub-2% swap rates) now maturing into a 4%+ swap rate environment
- Structures that worked in 2020-21 often no longer fit today's interest rate environment
