Real estate market players have argued that the Bank of England’s first interest rate hike since November 2007 will have a limited impact on their industry in the short term.
Triggered by higher inflation, the interest rate has been raised from a record low of 0.25 percent to 0.50 percent, where it sat for most of the past decade until the Bank’s decision to cut just after the EU referendum.
Under the assumption that rising rates are coupled with falling property values, the question for real estate players now is whether this is a ‘one and done’ move or the first hike of a gradual realignment that will bring an end a period of cheap debt which has benefited property investors over the recovery years.
“Extremely expansive monetary policies across the world have been a major tailwind for real estate, including UK markets. Now this is at an end,” said Chris Urwin, head of real estate global research at Aviva Investors.
“The gradual reversal of such policies means that we are unlikely to continue to experience the strong returns real estate has delivered over recent years. Returns are likely to be primarily driven by income from this point on. So, investors will need to be increasingly selective against a more challenging backdrop.”
Mainstream banks, however, seem “fairly relaxed”, as they have stress-tested their commercial real estate loans, said Walter Boettcher, chief economist at Colliers International.
“Given generally low LTVs, refinance risks are minimal. Interest rates would need to go up by a couple of hundred basis points before breaches of loan conditions would become a risk. A 25 basis points rise in this context looks insignificant, especially when the message from the Bank of England is that rates are to rise at a gradual pace and to a limited extent,” Boettcher explains.
Property lenders canvased recently by Real Estate Capital about the well-trailed rate rise said a hike is likely to have a limited effect on their activities, as a quarter-point rate rise only reverses the cut seen last year, and the base rate is still at a historic low.
For Steven Cook, of structured property finance at Investec, the rate rise is likely to be welcomed by some in the real estate sector and reflects the wider optimism around the UK’s economic outlook.
“Market uncertainty has impacted both the residential and commercial development pipeline in London and the south-east, which have been stuck in limbo since last year’s EU referendum, and if this measure can bring down inflation, particularly in construction costs, this is good news,” Cook said.
The rate rise, however, could worry property developers and borrowers that are using banks to finance their loans, as they charge based on a margin to LIBOR, which will go up in line with the base rate rises.
“It’s likely brokers and lenders would have already factored a base rate rise into their plans, and after months of seeing lenders slash their rates, we may start to see them increasing again in the coming weeks,” said Danny Waters, CEO of specialist provider of mortgage finance ENRA Group.
Anthony Shayle, head of real estate debt EMEA at UBS Asset Management added: “Whilst lenders may see opportunity, the real estate world may be more circumspect. Watch for loan tenors running to term or maturities extending as a signpost to weakness in the capital markets.”