Market View
Each week TheBusinessDesk.com asks experts from Yorkshire's property community for their views on a burning issue affecting the market.
This week's question is:
Will last week's interest rate cut help the property market or was more drastic action required by the Bank of England to aid the economy?
Andrew Summersgill, partner-in-charge of the investment department at the Leeds office of property consultants King Sturge:
“The interest rate cut is probably seen as a positive step for the economy rather than a significant step for property itself.
“Current activity in the commercial property investment market is largely dominated by debt-related buyers; property companies and their ability to buy is significantly influenced by any bank's lending position and associated criteria.
“At the moment, the base rate change has not affected the three-month London Interbank Offer Rate (LIBOR) – the international rate which provides the foundation for many bank lending arrangements.
“In fact, despite the base rate cuts, three-month LIBOR is higher than it was two months ago. As such these cuts have not, and are unlikely in the short term, to noticeably help the property market.
“The Bank of England has already undertaken measures to inject liquidity into the money markets in March although this fell some way short of what the major banks had called for and, in essence, this appears to have had little effect.
“It seems unlikely that the Bank of England can, or will, drastically intervene at this moment in time. It has clearly indicated that it has already helped the major banks and it is time for the banks to trust each other. Whether this will happen remains to be seen. However in any event, it seems unlikely that the Bank of England can single-handedly change the fortunes of the economy or the property market.”
Matthew Hopkins, investment agent at Gent Visick:
“The recent interest rate cut was in my view intended to help the man on the street with their mortgage payments and had little to do with the difficulties being seen in the commercial property sector.
“Assuming the Bank of England are acting from pressure at government level, it is already evident that Gordon Brown and Alistair Darling have little sympathy to the current plight of the commercial property market, as was seen when they refused to back down over their changes to the vacant rates liabilities as of the start of April this year.
“This significant increase in tax burden will hit developers, property investors and occupiers alike, and comes at a time when the commercial property market is already experiencing its most turbulent period in almost a decade.
“The issue with the recent interest rate cuts is that they are simply not being passed on by lenders. It would be easy to criticise but with the international credit crunch hitting the UK banking sector hard, these small incremental reductions to the Bank of England base rate are simply not having any significant effect on the LIBOR which is a far more significant figure to the banking sector as it is this rate which dictates the effective cost of money within the sector.
“Until we see the Bank of England reductions being mirrored by the LIBOR we do not expect to see any significant change to the current picture.
“Property investment is being hit not by the lack of interest in the market but by the availability of finance, at least on terms which are attractive to the investors. This is likely to continue until liquidity in the market returns, this is not going to be driven solely by some tentative Bank of England base rate reductions but will be part of a significantly more complicated package of measures, required to increase liquidity and equally importantly confidence in the financial markets.
“Bank of England base rates reductions are not a bad thing for the property investment market but until the government stop trying to use them as a headline grabber whilst increasing the tax burden and stifling development through changes such the new vacant rates bill, then the impact is going to be marginal.”
Matt Sharpe, senior tax manager of KPMG's property & construction group:
“Given that the property industry is currently dealing with the double whammy of lacking consumer confidence in the market and lack of mortgage funds, any steps in the right direction have got to be relatively good news.
“But, rather than whether the actual rate cut was drastic enough, I think the question is, to what extent will lenders decide to pass on this reduction to borrowers?
“I'm not confident the usual round of mortgage and savings rate reductions will transpire as institutions continue to pull their mortgage deals.
“While existing borrowers with mortgages tracking the base rate may benefit in the short term by lower repayments, consumers seeking new loans are not helped by the fact lenders are struggling to find liquidity and the cost of wholesale borrowing remains higher than the Bank rate. Until this disparity reduces, mortgage rates may continue to increase even though the underlying rate is falling.
“So, while not unhelpful, the MPC's decision to reduce interest rates may not be enough to boost the property market.”
Alex Munro, head of Knight Frank's commercial development agency in Leeds:
“While a 25 base point cut is welcome, this does seem rather pale compared to the pro-active response to the credit crisis of the Fed. The MPC does discuss financial markets developments, and since their last meeting a major Wall Street bank has collapsed.
“Also, last Wednesday the IMF cut its UK growth forecast for this year and next. In this context, I think a larger cut would have been justified. We now need to see the reaction of the commercial banks to gauge whether this cut encourages more lending.
“The last base rate cut was followed by an increase in the LIBOR rate, which is not typical and demonstrates how nervous banks are.
The commercial property market will be looking for evidence of a thawing of the debt freeze, which would have been more likely with a larger base rate cut.”
