The Bank of England has warned that the UK commercial property market remains “vulnerable to repricing” in its financial stability report this morning.
The report stated that commercial property rental yields were low by historic standards, which would normally reflect expectations for strong levels of rental growth. However, it warned that low-interest rates implied that growth expectations were weak.
“Some asset valuations, particularly for some corporate bonds and UK commercial real estate assets, appear to factor in a low level of long-term market interest rates but do not appear to be consistent with the pessimistic and uncertain outlook embodied in those rates,” it said.
Goodbody analyst Colm Lauder said the Bank of England’s analysis suggested that “the risk premia for real estate is considerably understated at this point in time”.
The report also warned that prices in some parts of the commercial property market appear more stretched than others. For example, West End office prices were “well above the range of estimated sustainable valuation levels.”
Source “Property Week”