6 August 2018
After ongoing speculation over whether August would bring us the next base rate rise, the Bank of England last week voted unanimously to increase rates by a quarter point to 0.75 per cent, the highest level since 2009. Despite this increase there is still a wide gap between the risk-free rate, interest rates and all property yields compared to historical levels. As an indicator, the US fed rate rise has led to gilts strengthening but is yet to pass through to real estate yields. Borrowing rates are still significantly below property yields and therefore gearing will still deliver enhanced returns and the rate rise will not force investors to sell or adjust pricing. Thus we don’t see a rate rise at this level having a great impact on the commercial property market.
With regards to residential pricing, the interest rate rise of 0.25 per cent will not impact mortgage payments significantly and will do little to dampen a very quiet market both in London and the regions. The overriding issues for the residential market in London remain SDLT and taxation issues allied with global and political volatility.
Whilst the pound initially rallied following Thursday’s announcement it quickly fell against both the dollar and euro. Therefore the pound may continue to look cheap for foreign investors, which should continue to attract foreign investors to both commercial and residential property investments in the UK. We will continue to track exchange rates over the coming months in the case that sterling starts to creep up.
The last factor to consider is swap rates which remain relatively stable (10 year SWAP today is at 1.63 per cent – up 4 bps from 1.59 per cent) therefore a big rate rise in the short or medium term is unlikely. We don’t see the rate rise impacting confidence in either the commercial or residential market and expect the outlook for both markets to be business as usual.