Optimism bias often appears to be baked into the property industry. However, some negative headlines are impossible to ignore.

US withdrawal: rising oil prices and a weaker dollar have made the UK a far less attractive destination for American investors

Last week, Real Estate:UK (RE:UK) put out a report stating that investment in commercial property in the first quarter of the year was almost 40% down on the five-year Q1 average, at £9.7bn. Overseas investment fell 30% from £5.2bn in Q1 2025 to £3.6bn in Q1 2026, led by a drop in US investment.

To add to the industry’s woes, it appears that few expect to see a rebound in overseas investment until September at the earliest – and only if the US and Israel’s war with Iran is resolved and the Strait of Hormuz reopens. Those predicting that 2026 would bring a sustained recovery look set to be disappointed.

There is some comfort to be found in the fact that overseas investment volumes in 2025 were high by historical standards, meaning the Q1 dip was measured against a high base.

“The subdued first quarter follows a strong 2025, with foreign inflows rising 33% year on year to £27.2bn, the fourth strongest year on record, and accounting for a record 56% share of all UK commercial property investment activity,” the report says.

It is also worth noting that US investment – which accounted for 73% of overseas investment last year – was driven by a handful of major healthcare acquisitions, including Welltower’s £6.4bn purchases of care home portfolios from Barchester Healthcare and HC-One. However, that does not provide a full explanation for the Q1 dip.

Impact of a weaker dollar

“The slowdown suggests that the weaker dollar may already be affecting the relative attractiveness of UK assets for overseas buyers, with elevated financing costs and wider global uncertainty also contributing to a more cautious investment environment,” the RE:UK report says. For global uncertainty, read the conflicts in the Middle East and Ukraine.

Melanie Leech, interim chief executive of RE:UK, adds: “The significantly weaker start to 2026 highlights how sensitive international capital flows are to changes in the wider economic and geopolitical environment. Sterling’s appreciation against the dollar may also be eroding some of the pricing advantage that helped drive exceptionally strong US investment into UK real estate during 2025.”

Keith Breslauer, managing partner and founder of Patron Capital, agrees. “At the end of 2025 and into Q1 2026, sentiment was clearly improving; capital was waiting on the sidelines, investors were becoming more confident and there was a growing sense that the market was turning a corner,” he says.

“However, that momentum stalled as geopolitical tensions, particularly the conflict involving the US and Iran, began to weigh on confidence. What was initially expected to be a short-lived disruption has instead persisted, pushing many investors into a holding pattern.”

In this situation, a rise in the Bank of England base interest rate is a distinct possibility, as surging oil prices have inflationary implications for nearly every part of the economy, not least construction. If construction costs rise again, development viability will take a further hit.

“People were getting used to the idea that interest rates were going to go down this year; we haven’t seen the rate go up yet, but people feel it’s coming,” says Richard Williams, group chief executive of the Ringley Group. “That’s had an impact on people’s positivity and confidence.

People are waiting to see what will happen. It’s a bit of a perfect storm
Richard Williams, Ringley Group

“I think the uncertainty, the inability to be confident and not knowing what else may happen as a result of the war led to everything just stopping. People are waiting to see what will happen. It’s a bit of a perfect storm.”

However, international events are only part of the picture. Some believe the UK government’s actions are also having a detrimental impact on investment, with RE:UK’s report arguing that several factors within its control are acting as headwinds to investment.

For instance, the English Devolution and Community Empowerment Act, passed in April, includes a ban on upward-only rent review provisions in all commercial leases. RE:UK argues that this adds uncertainty and potential delay to the investment climate, although the ban is not expected to take effect until next year, or possibly 2028, because of the need for secondary legislation.

Add to that growing calls for rent controls in the residential market, already implemented increases to employer National Insurance contributions and other changes to taxation, and commentators agree that the case for investing in UK property has arguably become less compelling.

Dominic Curran, head of communications at RE:UK, says the government is not helping itself. “On the one hand, it talks a good game when it comes to wanting to be pro-investment and attract capital to the UK and there are positive things like NPPF [National Planning Policy Framework] reform,” he says. “But then there are issues around the Building Safety Regulator [being slow to sign off buildings] and slightly mixed messages on things like their attitude to developers, whether that’s on rent controls or rent reviews.”

Curran’s point about rent controls follows speculation earlier this year that chancellor Rachel Reeves was considering such measures, after vowing in parliament to “use every lever we have to bear down on the cost of living, including for people in the private rented sector”. While housing secretary Steve Reed later said “I’ve been crystal clear, we’re not doing it”, the Green Party has also called for rent controls.

Curran adds: “I wouldn’t be surprised if the picture of the UK’s security and stability wasn’t a little bit murkier in Q1 of this year than it was last year because of some of the signals that the government sent out.”

There is also the issue of political instability, with a leadership challenge to prime minister Sir Keir Starmer likely if Andy Burnham can secure a place in parliament by winning the Makerfield by-election on 18 June. In such a scenario, a move to the left seems inevitable, given Burnham’s previous statements.

“It’s just another reason not to do something,” Williams says. “I almost feel like we’re getting into summer season already because people are just waiting. I don’t think anything will happen now until September when everybody’s back from their summer holidays.”

So what are the prospects for the rest of the year? Breslauer believes three scenarios are emerging: “In the base case, we see a six-month pause before activity resumes, with oil prices stabilising at around $75 to $80 [per barrel] and a weak but stable economic backdrop. In a more optimistic scenario, resolution [to the Iran conflict] comes sooner, in the next month or so, potentially unlocking pent-up demand quickly. The downside risk, of course, is further escalation, driving oil prices higher and tipping the global economy into recession.”

On balance, Breslauer comes down somewhere in the middle. “The most likely near-term trajectory is continued softness in investment volumes, but with a gradual reactivation of refinancing activity helping to support lending figures,” he says. “Crucially, if the UK economy weakens further, as rising youth unemployment and limited wage pressure suggest, it increases the likelihood of interest rate cuts, which could provide a meaningful tailwind for investment later in the year.”