Interest rates cloud the commercial real estate market

As the summer season quickly draws to a close, it’s hard to remain overly optimistic for the rest of the year given the economic backdrop of rising inflation, rising borrowing costs and soaring cost of life.

The August monetary policy report from the Bank of England is rather bleak. Key bank rates have risen again by 0.5% to 1.75% and inflation, currently at 9.4%, is expected to reach 13% by the end of the year and remain at that level throughout 2023.

We are far from the bank’s target rate of 2%.

The speed of the recent rise in interest rates and increases in the cost of living surprised many in the commercial real estate market.

It remains to be seen how this will affect commercial property values, but it is clear that the underlying fundamentals have changed significantly, especially for those who have used debt to finance their commercial real estate projects.

The flip side is that those with equity, and there is plenty of it, will see their value erode if they leave their money in the bank.

Despite these headwinds, it is clear that a number of Northern Ireland-based businesses are performing extremely well as they emerge from the covid pandemic.

The Ulster Business Top 100 Northern Ireland Companies 2022 list indicated that the combined pre-tax profits of Northern Ireland’s largest companies have increased by 46% over the past year.

On the property front, we’ve also seen local property and construction company, McAleer & Rushe, announce a term finance deal with student accommodation provider Vita to develop 271 student apartments off Great Victoria. Street in Belfast.

Demand from food and drink operators remains strong, with Ireland’s largest native pizza chain, Four Star, planning to open 45 new pizzerias and create 360 ​​jobs in Northern Ireland.

Commercial real estate transactions have been quiet over the summer months; however, a number of properties have now come on the market, including the proposed George Best Hotel in the former Scottish Mutual Building, the Premier Inn on Alfred Street and the 135,000 square foot Millennium House office building on the waterfront of the Lagan River.

Many more are in the pipeline for sale, the most notable of which is the 480,000 square foot Rushmere Mall in Craigavon, which went into administration earlier this year.

While it is difficult to see beyond the immediate economic horizon, it is clear that debt-based investors will begin to come under pressure as their current funding arrangements come to an end and may be forced to put properties on the market.

Herein lies the opportunity for equity investors with cash in the bank.

:: Declan Flynn is Managing Director of Belfast Lisney Commercial Estate Agents.

Penny D. Jackson