Fiscal credibility will be key to Capital Markets confidence

WHAT CHANGED

The Budget arrived against a difficult backdrop of higher energy prices, persistent inflation and uncertainty over the path of interest rates. With limited room for manoeuvre, the Chancellor opted for a relatively restrained package of targeted support for households and businesses, tax changes and investment measures, rather than significant fiscal expansion. 

The Government continues to meet its fiscal rules, although with less room for error. Headroom against the current-budget rule has narrowed from £23.6 billion to £15 billion in 2029/30, with the OBR estimating a 56% probability of meeting the rule. The economic outlook is mixed: forecast GDP growth for 2026 was raised to 1.2%, but the 2027 forecast was cut to 1.0%, while higher near-term inflation leaves the outlook for interest rates uncertain. 

Financial markets took the Budget largely in their stride. Ten-year gilt yields edged lower to around 5.3%, SONIA swap rates were broadly unchanged across key maturities and sterling remained relatively stable. The Government appears to have done enough to keep investors on side without materially changing the longer-term fiscal picture, leaving 

WHAT THIS MEANS

For UK commercial real estate, the most important immediate outcome is that the Budget has provided reassurance to financial markets without adding further pressure to borrowing costs. While financing remains elevated, greater stability around gilt yields and swap rates should provide investors and lenders with a firmer basis for pricing, refinancing and investment decisions. This is a welcome development for a market where confidence and certainty are increasingly important in supporting transaction activity. 

Some of the Budget measures could have a more meaningful effect over time. Fiscal devolution and greater local control over funding may help bring forward infrastructure and regeneration projects, while additional investment in energy, grid connections, 

There are also implications for the sources and structure of capital entering UK real estate. From 2029, foreign sovereign investors would become liable for tax on UK property income and gains, although a new REIT route would provide access at a 15% rate. The proposal remains subject to consultation, but given the importance of international capital to UK real estate, it will be closely watched. 

Separately, stamp duty relief for qualifying transfers of LGPS property assets into pooled vehicles supports the wider effort to channel more domestic pension capital into UK assets.  

Overall, this was a Budget of stability rather than stimulus for UK CRE. It appears to have done enough to keep markets on side without materially changing the longer-term fiscal or financing picture. If gilt and swap rates settle, that should provide a steadier basis for property pricing and investment activity. But with borrowing costs still elevated, returns will need to come from income, rental growth and asset performance, rather than a rapid fall in interest rates. 

Against a more uncertain global backdrop, this relative stability should help preserve the UK’s appeal to overseas investors. The UK remains firmly on the radar of international capital and is the second-largest destination for global CRE investment in 2026. 

BOTTOM LINE 

The Budget has provided reassurance rather than a reset. Gilt yields may remain elevated in the near term, but the prospect of some easing from late 2026 into 2027 should give investors greater confidence to plan ahead. This could support a gradual move from caution towards more selective positioning. For UK CRE, the more meaningful opportunities are likely to emerge through asset repricing, income growth and the delivery of infrastructure and regeneration initiatives.