UK Property Share Prices Jump As Inflation Slows And Interest Rates Hold

Shares in UK listed property companies rose on Wednesday and Thursday after data showed that inflation was rising less quickly than expected and interest rates held, rather than increased, as a result. 

The FTSE 350 REIT index rose 4% across Wednesday and Thursday, starting its rise upon news that inflation rose by 6.7% in August — high compared to recent levels, but slower than financial markets had been expecting. 

That meant the Bank of England kept interest rates at 5.25% on Thursday after 14 consecutive rate rises. 

The rise in interest rates to 5.25% from close to zero in little over a year has had a  detrimental impact on commercial real estate. Borrowing rates are now higher than yields in most sectors, forcing investors that use debt to pay more in interest on a property than they are receiving in rental income.

Values and investment volumes have fallen sharply as a result. UK investment volumes fell 58% in the first half of the year, data from MSCI showed.

As much as 50% of London commercial property may be worth less than what investors paid for it, and investors won’t sell at a loss unless they absolutely have to, according to a note from MSCI Real Assets Head of Research Tom Leahy.

Shares in GPE rose 9% on Wednesday and Thursday. Also seeing rises were Landsec (7%), Segro (5%) and British Land (4%).

“Boosted by yesterday’s surprising inflation figures, this is absolutely the right decision in the face of recent economic data,” Investec Real Estate syndicator Gordon Milnes said in a statement on the decision to hold rates.

“Hopefully the Bank of England can hold their nerve and this is the peak, which will be a welcome boon for investors, developers and lenders. Now we need some further visibility on potential interest rate cuts, which should act as a catalyst for a rapid bounceback in real estate activity levels.”

The question now turns to whether there are more interest rate rises to come and whether the country will avoid a recession.

“We believe there is now a good chance that the bank rate has peaked — a view we share for both the Fed and ECB policy rates,” HSBC Asset Management macro and investment strategist Hussain Mehdi said in a statement.

“Although the latest UK pay growth numbers are a cause for concern, labour market data is lagging. Forward looking indicators suggest the UK economy is already flirting with recession, a backdrop consistent with cooling wage growth and a policy pivot.”