A Bank of England representative has cautioned that the value of commercial properties in the UK is stretched and this could make them lose value if interest rates rise or rental growth slows down, reported P2PFinanceNews.co.uk in February 2018.
Small to medium businesses that have used property to secure loans could be affected financially if the market is adjusted downwards. Three in four small to medium businesses have used commercial property of their own to obtain bank loans.
Commercial property valuations by lenders for bank loans and commercial mortgages take into account low interest rates and typical rental growth. Speaking at the Brevan Howard Centre for Financial Analysis on February 1, 2018, the Bank of England’s executive director of financial stability strategy, Alex Brazier, advised that if interest rates rise and rental growth slows down, commercial property prices could fall. He felt that modern valuations methods could be undervaluing property by around 10%.
If property has been bought at the top of a price cycle, it means that if prices fall, Brazier says that businesses could be:
“…forced into sales of property, driving prices down even further and making life even more difficult for those companies in the wider economy that have secured their debts on their property.”
A recent report by the CBRE found that rents in commercial property rose by 3.1% in 2017 but in London, office rents fell by 0.1%. These rent fluctuations highlight the uncertainty of predicting rental growth for commercial property valuation purposes.