Commercial property could be one sector to benefit if the Bank of England follows through with negative interest rates, analysts at JPMorgan Cazenove say.
With negative interest rate policy in the UK being examined “more seriously than ever”, according to JPMorgan economists, the US investment bank’s London property team looked at the implications for the sector, which is being pulled this way and that amid shifting sands of the coronavirus pandemic.
While the BoE has stressed that a negative interest rates policy, or NIRP as investment banks like to say, is not in its immediate plans, a further economic setback that extends into next year “would make a cut look likely”, the JPMorgan’s economists reckon.
Despite some mixed elements in the BoE’s recent communication, with some divergent views from members of the Monetary Policy Committee and a letter to the banking sector to check it would be prepared if negative rates were imposed, the BoE has been public in admitting it is taking a look at the possibility.
Focusing on London offices, where operators include Land Securities Group PLC (LON:LAND), British Land Company PLC (LON:BLND), Great Portland Estates PLC (LON:GPOR), Derwent London PLC (LON:DLN), CLS Holdings PLC (LON:CLS), Helical PLC (LON:HCL) and Workspace Group PLC (LON:WKP), the analyst said they currently expect a cyclical rental downturn and remain cautious.
“However, companies are well prepared to emerge on the other side (once the correction has happened) while potential yield support in 2021 could provide a positive catalyst.”
A new set of capital growth forecast models using London offices as a base infer a potential 15% capital value swing over the coming five years in a negative yield versus a rising yield environment.
“NIRP could also push UK yield spreads ‒ which are already among the highest on record ‒ into new territory,” the analysts said.
However, though today’s UK labour market data figures show a sizeable jump in the unemployment rate, the prospect of negative rates as a potential catalyst for property “could be some way off”.
But if BoE commentary intensifies and expectations become firmer, “this could become an important topic for real estate”.