Relief as Bank of England lowers base rate for first time in four years

Developers and investors can breathe a little easier after the BoE’s 25bps reduction, the first rate cut since before the pandemic.

The Bank of England’s decision to reduce the base rate from 5.25% to 5% came the day after the Federal Reserve opted not to cut the US interest rates.

There are hopes among UK property professionals that the rate may drop below 5% before the end of the year.

It could have been very different, though; the vote to reduce the rate was close, the Bank of England’s nine-member committee voted five to four in favour with governor Andrew Bailey among those in favour.

While a 25bps cut will not unlock development and deals overnight, it will come as welcome news for developers and investors who rely on borrowing to fund or buy schemes.

“The slump in investment volumes and refinancing challenges seen in the commercial real estate sector over the past two years, and depressed property company share prices, can all be traced back to the rising rate backdrop,” said Gordon Milnes, syndicator at Investec Real Estate.

“Whilst valuations look to be stabilising, further cuts will be required if we are to see a narrowing of the buyer/seller pricing disconnect that has paralysed the market, domestic and international capital being deployed into the sector at scale, and leveraged strategies becoming viable.”

In recent years, particularly since Liz Truss’s infamous mini-budget, which sent interest rates soaring, the cost of lending has proved prohibitive for many developers, forcing them to sit on their hands.

A long-awaited rate cut will provide proof to the industry that things are looking up and potentially usher in a return of dealmaking in the second half of the year after a sluggish H1 for the investment market.

“Today’s interest rate cut is very welcome and allows yields to stabilize and start to compress,” said Alex Russell, chief executive of Property Alliance Group.

“More importantly for us and all other developers, it improves development viability with the resulting reduction in finance costs. A further reduction in rates before the year-end will see a significant increase in transactions with investors ready to pounce.”

Adam Higgins, co-founder at Capital&Centric which recently announced plans to deliver 2,000 homes for the UK’s largest new town – Northstowe in Cambridgeshire – said: “The country needed a pick me up and this is what we’ve been waiting for.

“It’ll reignite confidence in the market and help to accelerate property schemes that have stalled. More than just kick-starting housebuilding and driving regen projects forward, it’ll make home ownership feel like it might once again be a prospect for many more people.”

The interest rate cut is also good news for homeowners on tracker mortgages. For those approaching the end of a fixed rate and looking to renew, the picture is now slightly brighter than it was.

However, those who last fixed their deals during the ultra-low rate years between 2009 and 2020 will still have to swallow a large hike in their monthly bill.