UK Commercial Real Estate Market Faces Downturn Amid Surging Interest Rates
Almost two-thirds of property surveyors in the UK believe that the country’s commercial real estate market is currently facing a downturn. This assessment comes as the Bank of England has raised interest rates, resulting in the toughest credit conditions since 2014. According to a survey conducted by the Royal Institution of Chartered Surveyors (RICS), 68% of its members consider the overall market to be in a downturn, despite some sectors such as industrial property, student housing, and prime office space remaining resilient.
The recent increase in interest rates by the Bank of England, bringing them to 5%, was a move aimed at combatting inflation that has reached its highest point among major advanced economies. Economists surveyed by Reuters anticipate another quarter-point increase next week, with rates predicted to peak at 5.75% by the end of this year.
These actions by the Bank of England have had a significant impact on the sentiment within the commercial property market. The higher borrowing costs associated with the increased interest rates are dampening investor demand and placing renewed pressure on capital values, according to RICS economist Tarrant Parsons.
The current financing conditions are the most stringent since RICS began gathering data on them in late 2014. The interest rates set by the Bank of England are now at their highest since 2008, and policymakers are deliberating on the extent to which they need to rise in order to bring inflation back to the target level of 2%, compared to the current 7.9% (as of June).
While the impact on households has been relatively limited or delayed due to the lower number of individuals with mortgages compared to the pre-2008 financial crisis era, the effect on certain business sectors, such as house-building, has been more pronounced.
RICS reported a decline in demand for office and retail spaces over the past three months, particularly for older and less energy-efficient buildings. However, there has been an increase in industrial demand.
The Bank of England’s decision to raise rates faced opposition from two policymakers who argued that the central bank had potentially already raised rates higher than necessary to achieve the desired inflation target.
Overall, the UK’s commercial real estate market is experiencing a downturn as a result of the recent surge in interest rates. The increased borrowing costs have affected investor demand and placed pressure on capital values. While certain sectors, like industrial property and student housing, have remained resilient, other areas such as office and retail spaces have seen declining demand. As policymakers consider further interest rate increases, the market will continue to navigate these challenging credit conditions.
