Economic Dominoes: is U.K. Next?

Maybe. The Bank of England’s Monetary Policy Committee has just reduced the Bank Rate to 5 percent, marking a .25 decrease from the previous lowered ate of 5.25 percent, which was set in February. However, even in an environment where the credit market is tightening, the commercial real estate industry in the United Kingdom is expected to go relatively unscathed.A 2.5 percent increase in inflation and its anticipated continued increase spurred the change in the rate paid on commercial bank reserves; inflation has been on the rise in the U.K. due to such factors as mounting energy and food prices. And, as is the case in the United States., growth is slowing down. The rate reduction, the Bank noted, is essential for meeting the 2 percent target for CPI inflation in the medium term.As far as commercial real estate is concerned, industry experts anticipate that the rate change will not have a negative impact. “The housing market is very soft, but it reacts separately from the commercial market, because lenders in commercial markets are different,” Steve Williams, international consultant to Real Capital Analytics, told CPN today. “The pipeline of equity has not diminished; investment funding needs to find a home.” Compared to the U.S., the U.K.’s commercial real estate climate–even in light of the credit crunch–is a bit of a different animal. “The U.K. is very different from the U.S. because land is scarce,” he said. “There’s nowhere to go, so you don’t have huge areas of oversupply. It’s very hard to oversupply a geographically small area.”It is likely, however, that the lowering of the rate will have a slight positive influence on the commercial credit market. “The mortgage market is slow to react to federal adjustment of rates, but it does ease the commercial lending market,” Williams noted. “Lenders will be more willing to lend because they may have a slightly increased reservoir of funds.”And what does this all mean for the real estate market in the United States? “The recent drop in rates in the U.K. will have little immediate effect on both U.S. and U.K. real estate,” Steve Collins, managing director, Americas for real estate services firm Jones Lang LaSalle’s Intentional Capital Group. “Those investors already invested in the U.S. or recently looking will move forward with guarded optimism in looking for investments. The current dollar vs. sterling is of greater interest and has caused a slight increase in interest from U.K.-based funds looking to diversify into the U.S. markets and take advantage of this arbitrage in value. Typically, those U.K. investors are low leveraged buys and as such, in most cases, their borrowing rates will not move much below an already favorable rate and terms.”