Patience is required in UK CRE - Bank of England takes a more cautious approach to rate easing

The Bank of England takes a pause, holding interest rates at 5%

On the heels of the US Federal Reserve’s decision to cut interest rates by 50 basis points, the Bank of England in an eight-to-one vote decided to hold firm on rates, a widely anticipated decision in line with the Monetary Policy Committee’s (MPC) commitment to cautious rate easing. 

In August the bank lowered its rate from 5.25% to 5%, the first rate cut in England since March 2020. According to Bank of England Governor Andrew Bailey, inflationary pressures had “eased enough” to warrant a reduction, however he stressed that policymakers “need to be careful not to cut interest rates too quickly or by too much”. 

Inflation numbers remain unchanged in August but above the bank’s goal 

In the latest official data, Consumer Prices Index (CPI) revealed inflation remained at 2.2% in August, unchanged from the prior month.  While far down from its peak during the cost-of-living crisis, inflation remains above the Bank’s 2% target – a significant factor in the decision not to rush the lowering of rates. 

Experts anticipate another rate cut of 25 basis points at the next meeting of the MPC, scheduled for November 7th, a little more than a week after the newly elected Labour Party’s Autumn Budget, which should help shed further light on the UK’s fiscal outlook.   

What this means for commercial real estate 

After several years of elevated interest rates, central banks around the world have begun the process to unwind the cost of borrowing, though perhaps not at a pace that has immediate benefits to commercial real estate. The bank rate is not the rate at which businesses or investors borrow money, so it will take some time for benefits to flow through to commercial real estate. 

Values across Altus Group’s Pan European dataset remained largely unchanged in Q2 2024, registering just a -0.06% decline, the smallest downward revision since values started falling back in Q3 of 2022. 

“Commercial real estate would certainly benefit from more aggressive cuts” said Phil Tily, Senior Vice President at Altus Group, “but the industry will have to settle for more incremental improvements, and we are starting to see that in some sectors.” 

In Q2 appreciation levels finally crossed the divide, turning positive in each of the main sectors, except offices, in the quarter as improvements in cashflows counterbalance further yield expansion. 

Elevated borrowing costs have hindered much of the industry, in particular the office sector, increasing the risk of market distress and foreclosures. 

“The bank has a difficult job to balance a variety of economic factors,” said Tily.  “Commercial real estate firms have to be relieved that there is a concerted effort to bring rates and borrowing costs down. But it’s a process that requires a bit of patience that some properties might not be able to afford.”  

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