Financial News & Investment Views

Keep up to date with financial news and information

Higher borrowing costs will impact residential and commercial property values.

  • Monday, November 14, 2022

London, Canary Wharf at sunset. Banking and business part of London with skyscrapers.Mortgage costs have been in the headlines recently after the rise in the UK gilt yield. Lenders pulled mortgage products in expectation of a sharp increase in base rates. Many mortgage products have now been re-introduced but at three times the interest rate cost.

The implications of higher borrowing costs will have an impact on residential property prices and commercial property funds as well as the stock value of house builders. It has already been forecasted, that house prices could fall by 8% in 2023.

We have seen property funds and house building stock fall more heavily than the FTSE All Share index. Both had done well after the end of lockdown due to higher consumer savings and property deals taking place. The sharp contraction in money supply since the start of 2022 has seen the property sector suffer significant losses.

Property values are tied to interest rates as property transactions are the most often geared investment as individuals and companies borrow to build or buy property. The loan to value matrix a vital factor. If borrowing costs are rising and valuations are falling, then losses are inevitable. The fact we have been living through over a decade of ultra-low interest and inflation rates brings this more into focus.

One sector that is showing the pressure of interest rate rises is Real Estate Investment Trusts. (REIT’s). These funds are unusually leveraged and that borrowing costs will be now more expensive if not stressful. This sector has seen £100m withdrawn out of commercial property funds since the mini-budget. Therefore, funds are also suffering from liquidity issues and borrowing costs.

It is not a surprise that commercial property is a focal point of this credit cost increase. Particularly as occupancy levels of offices has not been fully recovered and that hybrid working is more common. In the UK commercial property market there will be strains for some time. However, in London there has been a building boom and supply is strong. The demand for space is holding up and rent defaults are low.

Comments are closed.

Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.

Our Contacts

Estate Capital Financial Management
7 Uplands Crescent,
Swansea, South Wales,
SA2 0PA.
Tel: 01792 477763