London deal volumes fell by around a third year on year to £3.26bn in Q1, driven by a dip in hotel sales and a slow period of office deals, according to MSCI’S Q1 Capital Trends report.

The report found that while only a handful of deals were completed in the capital during the quarter, the outer London industrial market was one of the first to bounce back.

MSCI said that although the UK, alongside Germany, was the most active property market in Q1, the considerable year-on-year fall in deal volumes was “unexpected”.

Total returns were in positive territory and the general investor expectation was that 2025 would be a good year to return to the market. However, geopolitical and economic uncertainty and volatility in the bond market means debt costs remain high.

Anecdotal evidence suggests there were also fewer properties on the market after a busy end to 2024.

Negative sentiment about large swathes of the office market continues to have an impact, the report noted, with Q1 2025 the slowest period for office investment since 2009.

However, the relative stability, income generation and some protection against inflation may support the wider investment case for real estate compared with other asset classes, according to the report.

Other recent reports show Europe’s residential sector remains chronically undersupplied and investment in housing is largely insulated from the recent spike in trade tariffs.

Tom Leahy, MSCI’s EMEA head of real assets research, said: “Given the unpredictability of the new Trump administration, it is difficult to make confident predictions about the next 100 days, let alone the next seven years, which is the typical institutional holding period for commercial property.

“While real estate is not immune to a shift in the global order, the longer investment time frames typically allow for a more considered and less reactive approach to strategy.”

He added: “Investors with a clear strategy and the patience to ride out turbulence may find that periods of dislocation ultimately offer the strongest foundations for future outperformance.