What's next for development as interest rates rise?

By Ben Monteith

For the past decade, many of us have inhabited a blissful world in which we never had to talk about interest rates. While they have yet to become water cooler chat, they now come up in virtually every conversation we have.

Journalists are asking developers and investors. Developers and investors are asking advisors. And advisors… well, advisors will never admit to asking questions because it would imply they’re not omniscient (although I have heard one or two casually broach the topic with journalists in the hope that the latter will have asked someone who knows the answer).

And the question everyone is asking is: what happens next?

While no one has a crystal ball, it’s particularly those in the earlier years of their career that don’t have a lived experience reference point. If you began your career in the property sector in the past 15 years, you’ve only known a time of low interest rates.

The last time we had interest rates as high as they are today was 7 January 2009, the day before rates were reduced to 1.5% from 2%. One year before that, on 7 January 2008, interest rates were at 5.5%.

Since the global financial crisis, we’ve had low interest rates and cheap debt. For many, that opened up a wealth of opportunities when it came to development.

So, now that inflation is soaring and interest rates are bumping up, what’s the outlook? What, indeed, does happen next? The initial assumption is likely to be that people would begin to rein in their ambitions, putting projects on pause or scaling them back until the future is that little bit clearer.

Yet that doesn’t quite seem to be what’s happening.

That’s at least in part because the demand, across residential and commercial property sectors, remains sky high. According to Halifax’s most recent house price index, the cost of the average UK home fell in July for the first time in more than a year – down a mighty 0.1%. The annual rate of growth, then, fell from 12.5% to 11.8%. Which is still a pretty hefty price increase. In the logistics sector, despite Amazon’s profit warning back in May, vacancy rate is at a new low of just 1.18% as occupiers continue to take up new space and developers struggle to build at a pace that matches demand.

Meanwhile, we’re beginning to hear from some of our clients that they see a light at the end of the tunnel when it comes to the cost of construction. The post-Covid correction in the construction market in terms of labour and materials shows hints that it may be settling back to normal, with one logistics developer reporting that, instead of receiving huge quotes from contractors who are awash with work, they’re now receiving calls from said contractors who are looking to fill their days.

It's early days, inflation remains a challenge and rising rates are throwing a spanner into the works – but it does seem like the property industry will continue to grind on for some time still.

This article was originally published in Advocacy Local’s Politics and Planning Newsletter. To receive our fortnightly newsletter straight to your inbox, subscribe here: http://eepurl.com/htOBCv