The 14-year era of low interest rates and depressed bond yields is over. Cheap debt and the wide spread between property and government bond yields that was a boon for real estate has given way to significantly higher global government bond yields and volatility. Rates are unlikely to drop back to where they were any time soon, if ever.
The situation is more pronounced in the United Kingdom. Since 2022, yields on UK government bonds (gilts) have risen more than those from other major economies, reflecting that some risks are gilt-market specific.
Our base case remains that UK borrowing costs will come down over the next five years, but we believe the current cycle will be radically different from the previous one for real estate investments. Spreads are unlikely to widen as much, and the driver of capital growth in our latest forecasts is income growth over yield compression.
Given this background, there are some key calls that can be made on the UK gilt market.
