The repercussions of the coronavirus pandemic are causing the UK economy to enter what may be a deep recession. Could you ever picture a time when individuals would happily put their money into ventures with the potential for a loss? We are all aware that investing entails risk because there is always a chance of losing cash whether buying a stock, bond, or piece of “commercial property for sale London“.

The Bank Of England: An Overview Of Interest Rates

The government’s goal inflation rate of 2% is to be upheld by the Bank of England. 2% has long been regarded as a suitable goal for regulating costs, savings, and spending. The objective is to provide stability so that people and businesses can make plans. The Bank of England uses various tools to manage inflation, including interest rates.

All banks, building societies, and other lenders in the nation base their interest rates on the Bank of England Base Rate. The basic working theory underlying the Base Rate’s impact on inflation is that raising it causes saving to increase and spending to slow, whereas lowering it causes spending to grow and saving on slowing.

Low-interest rates reduce borrowing and lending costs and result in poor returns on low-risk asset classes like bonds. Investors are prompted to look for higher-risk alternatives, such as real estate. Therefore, historically, a low-interest environment has been associated with increased house values.

Regarding mortgages and business loans, the current low-interest rate environment of 0.1% has pushed banks to “turn on the taps.” All forms of economic activity are strongly encouraged to get the economy flowing again in whatever way possible.

We are travelling through uncharted waters now that low borrowing rates have become the norm. Older economic frameworks and models can’t adequately capture the changes in the economy today. Discussions of negative interest rates, which, while uncommon, are a notion of becoming familiar with, serve to highlight this.

Commercial Property And Low-Interest Rates

Like other investments, interest rates and inflation inevitably influence commercial property investments. It would be foolish to ignore the significant contributions of many other economic issues. Commercial real estate and interest rates have a complicated relationship because low-interest rates are a symptom of a contracting economy, which would lead to lower yields and increased vacancy rates for commercial real estate. Conversely, low-interest rates, primarily those as low as 0.1%, ensure extremely inexpensive lending, stimulating activity in the retail market as investors look for leverage. Due to the availability of high-LTV, low-interest mortgages, low-interest rates increase debt yield.

On the other hand, rising interest rates and inflation drive up borrowing costs while also signalling economic expansion. This could result in increased yields and decreased vacancy rates. Commercial real estate was once employed as a hedge against inflation to shield investors from declining money’s buying value. Inflation like we’ve previously experienced, such as 25% in the 1970s and 10% today, seems incredibly unlikely.

Analyzing the relationship between interest rates and commercial real estate requires nuance because interest rates are influenced by delicate economic situations and do not exist in a bubble. In contrast to the low-interest-rate environment that prevailed throughout the 2009 financial crisis, the low-interest-rate environment we currently witness is one such example. At the beginning of 2008, interest rates were 5.25%; by March 2009, they had dropped to just 0.5%, and they are much lower currently, though for different reasons.

Although low-interest rates should stimulate the market for commercial real estate due to the superior performance of commercial yields compared to bonds and other assets, the broader economic context of the pandemic means that commercial real estate is also affected by low consumer confidence, unemployment, and the rise in working from home.

Commercial Property And Negative Interest Rates

Negative interest rates are another component of the interest rate-commercial real estate problem. Commercial banks, building societies, and other lenders were initially alerted by the Bank of England to the likelihood of a negative base interest rate in 2020. They declared in February 2021 that banks should be “operationally ready” to use negative interest rates if the economy faltered after the first post-pandemic recovery indicators.

Take Away

Negative interest rates are not a myth; they exist. Simply put, they still need to wash up on our shores. However, given the ongoing rise in inflation, they are scarce and becoming less likely by the second. Whether this can continue is another matter; long-term economic forecasting is notoriously challenging.