They say that a week is a long time in politics, but for Liz Truss a month seemed far too long, beaten as she was by the lettuce. Whilst the financial markets are now starting to stabilise following the turbulence caused by September’s mini budget, they are now eagerly awaiting Prime Minister Rishi Sunak’s November budget which, as of the date of writing, has not yet happened. However, the UK Government and the Bank of England now appear to be much more aligned, and this will hopefully bring much needed political and financial market stability.
Nothing can hide the fact, however, that economic growth has stalled and the UK economy is now on the brink of recession with households facing rising mortgage costs, higher prices for essential items and a rise in energy bills which will stall spending in 2023. This is a time when the Bank of England would usually be cutting interest rates to support the economy, but the current huge inflationary pressures mean that there is no likelihood of that happening any time soon.
The commercial property sector is now operating within the context of a second economic contraction in three years, a rapid rise in the cost of commercial debt and high inflation, exacerbated by the ongoing long-term structural shifts in tenant demand precipitated by the pandemic – with retail being the hardest hit.
Activity in the upper echelons of the commercial market – at price points of circa £5m and above - has all but ground to a halt and the market is in a holding pattern waiting to see where the balls now land. Economic uncertainty, together with current pricing, has raised the risk profile of many investors, and commercial property yields are now moving upwards. There is now a massive gap between the expectations of purchasers (for lower pricing and higher yields), and those of sellers who are not yet willing to take a discount on price. This, of course, often happens in markets at this point in the cycle and will take some time to wash out. However, according to Savills’ recent research report, ‘commercial markets are repricing fast, and price discovery is happening more quickly than we have ever seen before in a falling market’.
