Hello folks and I hope you are enjoying your summer. Hopefully the last thing on your mind is an office - although if you are like me, I love trading throughout August because so many other people are on holiday…annoying yet effective contrarian that I am. Anyway, what’s been going on in the world of office from a macro perspective, and what’s yet to come?

We can’t have this conversation meaningfully without a broader macro one about interest rates and the overall environment. You’ll have noticed that rates have changed - this has a much larger impact on commercial property than residential, because commercial is much more sensitive to the interest rate, and specifically the RFR - the risk-free rate of return. 75%+ of all transactions are for owner-occupiers in resi, which seriously dilutes the impact of the rate.

In commercial, it’s all business, so when the risk-free rate of return - best proxy being the Bank of England base rate - goes from 0.1% to 5.25% and then back down, there is bound to be a significant impact. Indeed, the market has deteriorated over the past year (certainly in the auction space) because other relevant interest rates are the “mediums” and the “longs” - put simply, if I can currently get a 5.25%+ return investing in a 20 or 30 year Government bond, then taking any sort of interest rate sensitive position in ownership of a commercial property needs to have a significant premium.

Now that’s not just based on the net yield. Ownership also has the expectation baked in of increased value over time, but not necessarily at the moment if longer rates are drifting upwards (they have done for a couple of months). There’s two ways to look at that. Firstly, longer-dated government gilts are at a generational high, so they should come down a bit if anything. Unscientific, to say the least. Secondly, the cat is really out of the bag on how screwed up the economy is in the long run. The OBR’s recent report on Fiscal Risks and Sustainability was a real page-turner. If you haven’t read it you will have seen the output in the press, that we are bankrupt within 50 years as a nation without significant changes and action in the way we’ve run Government finances over the past 50 years.