Thanks to the recession caused by Covid-19, UK interest rates are now at their lowest rate in the Bank of England’s (BoE) three-centuries long existence: 0.1 per cent.

The question now is if the base rate could move into negative territory for the first time as the economic impact of the virus continues to bite, and the prospect of the UK reverting to World Trade Organisation rules post 31 December could lead to further hardship, requiring more drastic action to keep the economy moving.

The BoE certainly hasn’t ruled out the possibility, undertaking an investigation into the potential impact of negative rates, the results of which are due imminently. It therefore seems to be an opportune time to look at what the impact on commercial property could be if the UK joins Japan and the European Central Bank in having a negative base rate.

Firstly, the UK savings ratio (the proportion of disposable income saved) hit 29 per cent in 2020 as many consumers stuck at home suddenly saw their outgoings drop and those who were fortunate enough to remain in a stable financial position saw an opportunity to boost savings.

Some of this money undoubtedly went to pay down debt, but the issue in a post-vaccine world is whether when faced with getting no returns on their savings in a negative interest rate environment these individuals will switch from saving to splurging. A boom in consumer spending would buoy some property sectors, particularly retail and, as more and more swathes of the population are vaccinated and social distancing restrictions relax, the restaurant, hospitality, leisure and hotel sectors.

A negative interest rate would on the surface also seem to be a positive move for UK investment volumes. Faced with a choice of getting absolutely no return on UK bonds or an average all-sector yield on UK prime commercial property at just over 5 per cent, you would assume that you’d quickly see a big shift of investment into commercial property. After all, many of the big funds and institutions are sitting on surplus of capital they need to deploy, and pension savers and others need a return on their investment, so any return in this scenario is better than none and – compared to equities or other asset classes – property is a safer bet to deliver consistent returns.

But the equation isn’t quite as simple as it first appears.

We should remember that negative interest rates, just like those that spiral upwards, are generally a symptom of a troubled economy and there is no certainty as to how long rates would remain negative. Downbeat consumer confidence, beyond those who can opt to spend rather than save, and a subdued jobs market both have an impact on commercial property, whether that’s the performance or retail and leisure assets, or office occupancy and the rents that can be achieved.

All of this can impact the rental income part of the return from any commercial property investment, which could cause yields to soften, making, in some cases, real estate investment slightly less attractive than the headlines would first appear. If, however, negative rates are deployed as a short-term measure to get the economy back on an even keel and support those sectors which have had a torrid 2020 and help them retain employees, there could be some positive effects from going negative.

Further information

Contact Steven Lang

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