LONDON — One of the Bank of England’s most senior officials identified a problem at the heart of London’s inflated commercial property market in a speech on Thursday evening.
Speaking at Imperial College London, Alex Brazier, the bank’s executive director for financial stability strategy and risk said that the way in which investors are attempting to make returns in the commercial property market UK-wide, but particularly in London, is unsustainable in the long run.
That’s because, Brazier says, the market is relying on interest rates remaining very low in the future, while also expecting growth conditions to be favourable. Ultimately, Brazier says, that’s not going to be the case.
“At the UK-wide level, commercial property prices rest on persistently low interest rates but at the same time, they’re factoring in typical rental growth prospects and degree of uncertainty around them,” he told the audience at Imperial’s Brevan Howard Centre for Financial Analysis.
“It seems unlikely that rates can be so persistently low without either weaker growth prospects or more uncertainty.”
London’s West End, Brazier said, is a point of special interest. He described the interest rate/growth prospect dichotomy as being “particularly stark,” in the area.
“In London’s West End Office markets, the picture is particularly stark. Even if the magic combination of persistently low rates and historically typical rental prospects comes true, valuation methodologies similar to those being developed by the industry point to prices 10% below today’s level.”
Here are Brazier’s charts, from a presentation delivered alongside the speech:
No single factor can be blamed for this issue, Brazier said, arguing that a “range of underlying forces have driven down natural rates of interest, including demographics, perceived downside risks, expected productivity growth.”
“Precisely why these markets have become stretched is impossible to know for sure, but I’d caution against placing too much weight on monetary policy as the primary or underlying explanation,” he added.
The story of London’s commercial property market, was for many years, one of rampant expansion and surging prices. There is now evidence, however, that the market has moved into a downturn.
73% of surveyors responding to RICS’ quarterly UK Commercial Market Survey in October last year said the central London market was at some stage of a downturn, while 67% of respondents said the market is overpriced.
“The feedback to the … survey reflects some of the broader macro issues, with the underlying momentum in the occupier market a little firmer further away from the capital,” Simon Rubinsohn, RICS chief economist said at the time.
Source: Uk Businessinsider