Hotter inflation: does it matter?
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
The UK's annual rate of inflation jumped to a hotter-than-expected 3% in January, up from 2.5% a month earlier. Services prices, a key metric watched by Bank of England policymakers, rose from 4.4% to 5%.
While this is a setback, it probably doesn't shift the outlook meaningfully. Economists had been expecting the headline rate to rise a little less to 2.8%. Services prices were expected to rise a little more to 5.2%. The report also comes on the back of a pretty warm set of wage figures for December.
Bank of England governor Andrew Bailey and his colleagues have been giving soothing interviews since their February decision to cut the base rate to 4.5%. They make the point that the BoE's forecast of a rise in inflation to 3.7% later this year will be driven by volatile components, particularly energy prices, that will then fall away.
That view, plus the fact two MPC members voted for a 50 basis point reduction, prompted several mortgage lenders to execute a round of rate cuts last week. Santander currently tops the table with two- and five-year deals at 3.99%
Squeezing through
Any rise in the lenders' cost of funding as a result of this morning's inflation print would leave margins incredibly thin, however banks are increasingly willing to lend against their deposit book, leaving them less at the mercy of short term swings in the swaps market. See Tom Bill's piece from Monday for more on that.
The consensus view that the Bank will cut the base rate two or three times this year remains unchanged for now, which will be enough to fuel a 3.1% rise in mortgage lending through the year, according to EY Item Club forecasts published in the Times this week. That's more than double last year's rate of growth.
The property market is busy, all things considered, in part due to the looming April 1st deadline for changes to the stamp duty thresholds. The number of first-time buyers trying to complete transactions in the capital is a third higher than this time last year, according to a Rightmove report out earlier this week. Nationwide, there are more than half a million home sales going through the completion process, up a quarter compared to February 2024.
A regional shortfall
Office take-up across the UK's key cities surged 18% in 2024 to the highest level since 2019, according to Knight Frank's UK Cities Office Market Report. The professional services sector accounted for more than a third of the 5.6m sq ft of total take-up as many leading firms sought additional presence outside London and the sector employed stricter return-to-office mandates.
These firms generally want high quality offices: Grade A space accounted for more than half of total take-up. That competition has fuelled prime rental growth, which averaged 5.3% across our key cities. Notably, eight out of the ten cities tracked registered a rental uplift during the year.
Grade A availability stood at 3.5m sq ft at the turn of the year, which is a percentage point below the level recorded 12 months ago and 6% above the 5-year average. The vacancy rate for new and grade A space is just 3.5%, compared to 13% for the wider market. Just 1.9m sq ft of speculative space is scheduled for delivery over the next three years, which would lead to a 4m sq ft shortfall assuming consistent demand and no further additions to supply.
Rightsizing
These are compelling supply and demand conditions, but developers are grappling with several complexities, writes report author Darren Mansfield. High build and debt costs have pushed the 'prelet hurdle' from 30% to 50%.
Meanwhile, 'rightsizing' means traditional corporate requirements are shrinking, so 2-3 occupiers are now needed to meet the pre-let threshold for construction starts. Rents are rising, but they need to exceed £50 per sq ft for development to be viable. In contrast, comprehensive
refurbishments are becoming viable at rents in the late £30s to early £40s.
This is all creating a race to the market, and refurbishments are a faster and more cost-effective alternative to building new. They also come with lower embodied carbon. However, getting projects started can also be challenging: many buildings are stuck in a stalemate, with existing leases preventing repurposing despite being near vacant.
Darren also covers the market from the perspectives of occupiers, investors and lenders. Download it here.
In other news...
Kate Everett-Allen on the allure of Lake Geneva.
Elsewhere - how interest rates (should) impact house prices and rents (Bank of England), Australia to ban overseas buyers of existing homes (Bloomberg), nine in ten British workers have been called back to the office (Times), China's housing market stabilises (Bloomberg), and finally, UK Treasury rejects farmers’ inheritance tax compromise (FT).