Is the UK’s commercial property market stable enough to endure interest rate rises?
The UK’s commercial property market emerged as a winning asset class throughout 2014 and so far, its performance throughout 2015 hasn’t been too shabby.
In fact, F&C Commercial Property Trust Ltd recently announced that value per share increased in the first half of 2015.
“The UK commercial property market has continued to deliver strong positive returns, led by the investment market but also benefiting from a growing economy and an improving occupational market, as the recovery spreads beyond London and into the regions. Rental growth is now being recorded in most parts of the market, with London leading the way,” F&C Commercial Property Trust Ltd Chairman Chris Russell commented.
Despite the sector demonstrating clear signs of recovery, we ask if the UK’s commercial property market is stable enough to endure a rise interest rates.
The latest report from Knight Frank shows that the all property capital growth index increased by 0.7% in July (month on month), slightly down on the 0.9% recorded in June.
The volume of investment from January to July reached £38.4 billion. A notable increase from the £31.1 billion reported in the same period in the previous year.
‘Normally a rise in interest rates signals that the UK economy has moved into a period of excess, and the Bank of England has decided it is time to rein back inflationary pressures. So it is unusual to find widespread discussion on when interest rates will rise at a time when inflation is largely absent, and could stay that way for some time,’ said James Roberts chief economist at Knight Frank.
‘However, this rate increase is different. It is a sign the UK economy, like the US, is getting near to the day it can throw away the crutches of very low interest rates. Indeed, UK policymakers now want the safety net of higher rates. Should we hit another economic crisis, the Monetary Policy Committee (MPC) will thus have the option of cutting rates before resorting to printing money,’ he explained.
‘Parts of Europe presently have negative interest rates, and were some fresh disaster to unfold, they would have little choice other than to plunge further into the minus figures, or print money. All this increases the UK’s safe haven credentials. This probably explains why at present the commercial property industry seems to be so little concerned about the approach of higher interest rates,’ he pointed out.
‘When presenting to clients on the UK market one is more likely to be asked about the impact of the EU in/out referendum, or even the Chinese slowdown, than a rate rise. We live in a world of hedges and swaps which soften the impact of rate rises, and the Bank of England is giving lots of guidance to prevent firms and households from being wrong footed. So while the cost of debt will rise, most borrowers will be ready for the change,’ Roberts added.
So can the UK’s commercial property market endure a rise in interest rates? Experts expect it most certainly can as long as the market is brace for the change.