The Bank of England has increased interest rates for the sixth time in a row, this time to 1.75%.
The Monetary Policy Committee's 0.5% rise is the biggest for 27 years and comes as the Bank battles the highest inflation levels seen in 40 years, alongside rising energy bills and political pressure from likely new Conservative leader Liz Truss, who would reportedly review the Bank's mandate over raising rates if she comes to power.
While interest rates remain historically low, there is general consensus that there are more rises to come. So what does that mean for commercial property, where interest rate levels are traditionally one of the most important levers affecting activity and sentiment.
The successive rises have already contributed to a slow down in transactional activity as participants take stock of the affect on pricing, and notably a thinning of prospective buyers as debt costs increase and reduce return assumptions.
Some sectors, such as retail, appear particularly exposed to the squeeze on consumer spending and are already trying to digest the likely hit to occupiers.
BNP Paribas Real Estate reported last week that sales of London offices have dropped sharply and values are being revised lower as rising interest rates alongside potential recession are pushing the biggest market “reset” since the financial crisis.
Nevertheless, there is consensus that in certain strong performing sectors, such as logistics and prime offices, investors have priced in the likely impact and are ready to pick up activity in the final few months of the year.
Roger Clarke, CEO of IPSX, the pioneering commercial real estate single asset stock exchange, says commercial property is well placed compared to many other sectors: “The BoE raising rates is unwelcome news for borrowers and investor as higher rates mean higher financing costs for investors and weaker consumer sentiment, which means that allocators will continue repositioning their exposure towards assets with reliable sources of visible income that can act as a hedge against inflation."
Fortunately, Clarke says, liquidity is not as scarce as it was in 2008 and that should prevent commercial property void rates from increasing in any substantial way if a sharp downturn does occur.
"Certain subsectors are more vulnerable than others as a result of the cost of living crisis, particularly retail, with lower spending likely to dampen performance and capital values. However, low levels of debt and inflation-linked lease agreements mean that that commercial property is well placed compared to many other sectors.”
James Roberts, director, Insight at Avison Young, says the rates rise will likely mean some upwards pressure on yields over the summer, particularly as further rate hikes are expected in the autumn.
But he says it is doubtful that property yields will soften dramatically as the "vast majority of property firms and funds are well capitalised, so are unlikely to be pushed into forced sales".
Roberts says it's important to note the Bank of England is not keeping pace with the US Federal Reserve on hiking rates.
"The Bank of England is now at 1.75%, vs 2.50% for the Fed. This has caused sterling to fall in value this year, and historically a weak pound has been good for UK property sales. The favourable exchange rate is already drawing overseas buyers to the UK, and we expect to see more deals follow in the coming months.”
Viv Watts, co-founder of AGO Hotels and a property investor across the commercial and residential space, says that while it is clear inflation needs to be curbed it is disappointing that the tool used is interest rates.
"Currently we are facing supply-side issues and raising interest rates will not solve this. The result, instead, is simply making things unaffordable for people and pushing them into a territory of not being able to continue to afford those things that they previously consumed; especially, even small luxuries, like travel and holidays.
“For the hotel sector as rates rise, we are feeling the pinch. Business costs rise but we can’t continue to pass these costs to customers who are struggling to cope with soaring prices. Difficulties in finding staff have also only added to cost increases.
“No-one has a silver bullet to control inflation but instead of raising rates, the government needs to seek solutions to tackle supply side issues, specifically on food and energy issues. By taking its current approach, they are simply treating a sprained ankle by breaking a finger – using this to distract from the bigger issue.”
In terms of the housing market, Frances McDonald, research analyst Savills, says today's rise will have been factored into many buying decisions, though successive rate rises are undoubtedly contributing to slowing house price growth.
"Rates are in line with our forecast assumptions for 2022, with the expectation that annual price growth will slow to 7.5% by the end of the year, down from its current 11%.
“The five base rate rises we have already seen over the last six months have caused a significant increase in the cost of mortgage debt. For someone borrowing a 75% mortgage, the average quoted two-year fixed rate more than doubled over the year, from 1.39% in June 2021 to 2.88% in June 2022.
“Although these rate rises will have the greatest impact on new entrants to the market and those on variable or tracker mortgages, they will also affect those wanting to trade up the housing ladder, particularly given the strong price growth we’ve seen of late, unless we see lenders absorbing some of the increases."
McDonald says over the next five years Savills is forecasting average UK house prices to increase by +17.4%.”