Deflation not a threat to UK commercial property

Figures released this week show that UK inflation turned negative in April to minus 0.1%. This is the first negative reading of inflation on the CPI measure since the series began.

However, the mild deflation the UK is currently experiencing is mainly due to the sharp fall in the oil price over 2014 and early 2015 rather than weak demand in the economy. As such DTZ does not think it poses a threat to the UK commercial property market. Take-up of office space reached nearly 20 million square feet in the main UK markets last year and activity is expected to remain healthy this year.

Rather, deflation is causing the Bank of England to delay interest rate rises and feeding through to lower bond yields and forward rates. This is sustaining property’s appeal to investors on a relative pricing basis. Indeed, given its attractive income yield and scope for capital value uplift, investor interest in commercial property remains strong.

Fergus Hicks, DTZ’s Global Head of Forecasting, said: “We think the mild deflation the UK is now experiencing is, if anything, positive for the property market. It is causing the Bank of England to delay interest rate rises and sustaining property’s appeal on a relative pricing basis. Moreover, it is due to the oil price shock rather than any underlying weakness in the economy, which is showing strong growth.”

Ben Clarke, DTZ’s Head of UK Research, added: “We continue to see strong investor interest in UK commercial property, particularly outside of London. We expect this to continue to push property yields down and that returns on UK property will be in double digits for 2015 overall.”