Real estate
Overview
Real estate refers to property that is purchased or held in order to obtain the income and capital growth it produces, and it can be divided into two main areas which behave in a very different way: residential property (which includes houses let to or owned by individuals) and commercial property (which consists of buildings let to businesses, such as offices, retail space and industrial space).
In the case of residential property, there is a further division between owner-occupation, that is when someone buys a house in order to live in it, which at the same time serves as an investment since the value of the property usually stays the same or increases, and buy-to-let, where a landlord purchases a property with the intention of letting it out in order to earn a return.
Commercial property is quite different: it involves larger sums of money, longer leases, and returns that depend heavily on the sector (offices, retail, or logistics) in which the building is located. To understand real estate as an asset class, you need to understand both parts and where they diverge.
How real estate generates returns
In residential and commercial property the returns arise from only two factors: capital appreciation (that is, an increase in the value of the property over time) and rental yield or rental income (the amount a landlord gets from letting out the property, expressed as a percentage of the property's value).
The details, though, are different. In the UK gross residential rental yields are generally between about 4% and 8%, with lower yields occurring in expensive southern areas such as London (where the high prices result in a low yield percentage even though the actual rent figures are high) and higher yields in northern cities like Liverpool and Sunderland, where prices are lower compared to the rents that can be obtained.
Conversely, commercial leases have in the past been much longer than residential tenancies, having historically lasted from 10 to 15 years, though the average length of such leases has now fallen to about 5 to 10 years as tenants demand more flexibility, and many of them include upward-only rent reviews, which means that rent can be increased in line with the market or with inflation but cannot be reduced during the term of the lease.
This gives commercial landlords a certain degree of income security which residential landlords, who have considerably shorter tenancies, do not have.
Residential property
The UK housing market is influenced by three major structural factors. First, almost all people who buy houses do so by obtaining a mortgage: because the cost and availability of credit directly affect how affordable houses are, these factors are important. By the middle of 2026, average house prices in the UK had risen to about £271,000 to £277,000 depending on which index is used (that is, either the Land Registry's or Nationwide's), while mortgage rates averaged 5.5 to 5.6 per cent after the Bank of England had kept its base rate at 3.75 per cent right up to mid-2026.
A second factor is that the supply of houses is restricted by planning regulations, for instance due to the green belt restrictions surrounding major cities, which slows down the rate at which new houses can be built even when demand is high; the government has not met its annual target of about 300,000 new homes in England for most of the last decade.
Third, regional differences are significant, with prices in London and the South East two to three times higher than the average in the North East or in some areas of Wales.
Investors can gain exposure directly by buying a particular flat or house, whether or not they pay the full amount or use a buy-to-let mortgage, or they can do so indirectly via Real Estate Investment Trusts (REITs) such as Grainger plc (which is the largest listed residential landlord in the UK, owns more than 11,000 rental properties and makes substantial investments in build-to-rent) or the PRS REIT, which builds and lets purpose-built family homes for rent.
Although direct ownership gives full control, it also locks up a large amount of capital in a single, illiquid asset; REIT shares trade on the stock exchange within seconds, but this means you lose control over individual properties.
Commercial property
Commercial property is made up of three sectors which have become increasingly divergent since the pandemic.
In the case of offices, there has been a real review of demand as a result of hybrid working reducing the amount of space that many companies now need, although this effect has not been even across the board: older and poorly designed buildings have found it difficult to cope while demand for high-quality, energy-efficient "Grade A" space has remained strongly intact, a phenomenon referred to as the "flight to quality".
Logistics and warehousing have been the clear winners from the overall shift to online shopping; each extra pound spent online calls for about three times as much warehouse space as the same amount spent in a physical shop, with logistics take-up in the UK expected to reach around 44 million square feet by 2026, that is 10% higher than in 2025.
High street and shopping centre retail has had the most difficult ten years, suffering from e-commerce, increasing costs and major failures such as those of Debenhams and Arcadia (the owner of Topshop); national vacancy rates are still high and highly varied, there being single-digit vacancy rates in prosperous city centres while in struggling towns about one in five shops are empty.
For the majority of investors, commercial property is obtained via REITs such as Segro (the largest REIT listed on the London Stock Exchange and one that specialises in logistics and warehousing), Landsec (which deals with shopping centres, retail parks and large office developments in London) or British Land (a diversified portfolio focused on London that dates back to 1856), or through open-ended property funds which gather together investor money to invest in a directly held portfolio of buildings.
Risks and criticisms
Real estate risks vary by sector but share similar origins. Both the residential and commercial sectors are affected by illiquidity, since a residential property sale usually takes weeks or months to finish and commercial properties can take an even longer time, and this has caused real harm through the suspension of funds on an open basis: following the 2016 Brexit referendum, fund managers such as Standard Life, Aviva, M&G and Henderson held around £13 billion of investors' money for months because the number of requests for withdrawal had exceeded the speed at which the properties could be sold, and a comparable situation occurred in multiple funds in 2020 when the COVID-19 pandemic led valuers to state there was 'material uncertainty' regarding the values of commercial property.
The risk associated with leverage is most severe in the case of residential property, since most purchases are financed by mortgages: if a buyer has made a 10% deposit and the value of the property then falls by 10%, they have in effect lost all of their equity.
Both markets are sensitive to changes in interest rates, since mortgage costs influence residential affordability and landlord profitability, while commercial property values move in the opposite direction to the yields that investors require, which in turn are determined in relation to interest rates.
Commercial property involves greater risks when it comes to valuation, because buildings are not frequently traded, published valuation figures can therefore lag behind the price at which they would actually sell in a rapidly changing market, and because of sector concentration, a portfolio that is geared towards struggling office or high street retail properties has had a very different experience to one that is geared towards logistics.
Residential property landlords have to deal with vacancies between tenancies, during which time the mortgage and other costs still have to be paid but no rent is received.