JP Morgan analysts have pointed to growing optimism around a peak in UK interest rates as likely mixed news for the commercial property sector.
Downgrading average sector price targets by 9%, JP Morgan noted upside still remained, but higher weighted average costs and lower capital growth estimates were to be expected.
“Expectations that we are nearing peak rates has firmed,” analysts said in a note, following the Bank of England’s decision to hold interest at 5.25% on Thursday.
As a result of the rate hike pause, “refinancing headwinds have moderated” across the sector, JP Morgan said, pointing to the positive side.
But on the negative side, “higher for longer now seems the base case”, analysts added.
Looking back, they also noted that previous “peaks” in the Bank of England’s interest rate cycle - for example in 2007 and 2004 - had prompted an immediate, but short-lived, outperformance across the sector.
“Our relative preference in the UK is for SEGRO, Tritax Big Box, LondonMetric and Grainger,” JP Morgan tipped.
“We would continue to avoid City office exposure,” analysts added, given the muted demand for London office space since the pandemic.