The Bank of England has cut its base rate to 5%, from its 16-year high of 5.25%.
It is the first drop in the interest rate since March 2020, and will be seen as key to shifting sentiment and unlocking a muted real estate transactional market.
The Bank has held rates at 5.25% since August 2023 as it tackled rising inflation. The decision was by no means a foregone conclusion with 5 to 4 committee members voting to cut.
The Bank's decision follows a general trend among central banks in Western economies to move towards rates cuts. The European Central Bank reduced rates in early June but has not committed to any further moves.
After a first interest rate cut in June, the Bank of Canada last week lowered its key overnight rate by 25 basis points, to 4.5%. Yesterday, the United States Federal Reserve said it could start lowering interest rates in September, but voted to hold borrowing costs at a 23-year high.
Daryl Perry, head of research and insight at Cushman & Wakefield, said alongside the political stability brought by a new government with a strong majority, and the Labour government's fiscal approach, for a number of investors, the first interest rate cut will be the "next piece of the jigsaw in creating an upturn in investment into real estate".
Perry said what the market had been lacking what Cushman calls "momentum," a sign of investor confidence, notably through a lack of large deals.
He said cuts in interest rates will reduce the costs of debt and that will be essential to unlocking the larger end of the market.
"Where there is cause for concern is the relative pricing of real estate. While there will now likely be a fall in 10-year gilts, the spread between risk free rates and property yields is at a 15-year low and will remain low for the time being."
Gordon Milnes, a syndicator, Investec Real Estate, said in a statement that whilst one swallow doesn’t make a summer, the property market will be "breathing easier" today.
He added: "The slump in investment volumes and refinancing challenges seen in the commercial real estate sector over the past two years, and depressed property company share prices, can all be traced back to the rising rate backdrop. Whilst valuations look to be stabilising, further cuts will be required if we are to see a narrowing of the buyer and seller pricing disconnect that has paralysed the market, domestic and international capital being deployed into the sector at scale, and leveraged strategies becoming viable.”
Simon Gammon, managing partner, Knight Frank Finance, said the decision will have a limited impact on mortgage rates but it will be "transformative" for sentiment.
"There is a meaningful group of buyers that put off moving home in the wake of the mini-budget that can now push on with confidence.
"The lenders have already cut margins to the bone, so this cut was pretty much priced into fixed rates. That said, we've seen that the larger lenders are happy to take a hit to profits to gain market share, so we may well see another round of marginal cuts in the days ahead."
Jim Gott, head of asset surveillance, Mount Street, said the commercial real estate lending market has seen a marked increase in deal flow during 2024, especially at alternative lenders, where volumes have been at similar, or possibly even above, pre-COVID levels.
"This suggests that lenders and borrowers were relatively relaxed about rate cuts, it was just a case of when, not if. It feels very much like a Goldilocks moment for alternative lenders, with asset valuations likely excessively depressed, interest rate expectations elevated and LTV expectations low.”
Lambert Smith Hampton figures show that United Kingdom commercial real estate transactions hit £11.1 billion in the second quarter, up 12% on the first quarter of the year and the strongest figures since the third quarter in 2022. But activity remains low historically, particularly in core markets such as London offices.
LSH chief executive Ezra Nahome says that while a lot of attention appears to have been focused on the first cut, more crucial is where interest rates will be in 12 to 18 months’ time. "That remains the glaring uncertainty for investors, and hopefully conditions will be conducive for a sequence of cuts as the new government settles into power."