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As the elections draw ever nearer the fear of increased interest rates resonate among the population of the UK. As a general rule UK commercial property appears to be able to absorb small rises in interest rates because unlike most other financial assets, property has not re-priced adjusting to the current very low interest rates; presently sitting at a comfortable 0.5%.
When valuing a property you need to look at its income forecast in the form of rent and lease lengths, and subtract this from the total capital costs; interest rates can affect both income and costs in a number of ways. For example a rise in interest rates will increase the cost of financing and mortgage rates increasing costs and affecting property values. Supply and demand for capital and competing investments have the greatest effect on values; when interests are low there is more capital available and loans/debt are more freely accessible. Therefore more capital is available for property purchases increasing demand and increasing values. When interest rates are low there is less capital available and fewer loans are provided thus less capital is available for property purchases. Interest rates directly link in the same way to property development which affects supply and demand of properties, which in turn affects rental prices and values.
Teresa Beatty from Morgan Pryce states that, “with the run up to the election there are many uncertainties meaning people often hold onto their money to wait and see what happens; as a general rule this causes prices to stay where they are or slightly fall. After the elections when these uncertainties disappear things should return to normal.” The questions isn’t whether interest rates will rise, the question is when and can our property market really absorb the increase.
This news was brought to you by Morgan Pryce, a specialist tenant acquisition agent with offices in Oxford Circus and the City. Morgan Pryce specialises in search, negotiation and project management and works exclusively for tenants.