UK commercial property is vulnerable to re-pricing with valuations failing to reflect risks in a low interest rate environment, the Bank of England has warned in its latest Financial Stability Report.
Property values have assumed lower-for-longer interest rates without factoring in the “pessimistic and uncertain outlook” that those rates imply, the Bank said.
It estimated that the range of sustainable valuations for West End offices would be between what they were in Q2 2007 and about 25% above that. The higher end of the range assumed that low rental yields persist with minimal rise in risk.
However, West End of London office prices are almost 40% above what they were ten years ago, which the Bank of England said made it “vulnerable to repricing, whether through an increase in long-term interest rates or an adjustment of growth expectations, or both”.
The impact, it added, could be amplified given reduced liquidity in the market.
The report went on to warn that heightened uncertainty during the Brexit negotiations could lead to a fall in appetite among foreign investors in UK assets. A “material reduction” in investors providing finance to the UK would tighten financial conditions for borrowers and reduce asset prices.
Commercial property would be particularly at risk because about half of all investment in the industry since 2015 has been financed by overseas investors.
To send feedback, e-mail karl.tomusk@egi.co.uk or tweet @ktomusk or @estatesgazette
