Property consultancy DTZ has predicted that early withdrawal of quantitative easing (QE) could negatively impact the UK commercial property market with London most vulnerable to any such move.
The result would be a decline in rental growth in key investor areas of the West End and City in particular.
DTZ has explored two scenarios surrounding the withdrawal of quantitative easing (QE). In March 2009, the Bank of England introduced its QE programme by buying GBP200bn of government gilts. Further purchases followed aimed at boosting confidence and market liquidity as well as stimulating expenditure through lower borrowing costs and increased wealth.
Bank of England guidance has stated that withdrawal of QE is set to begin in 2016. However, recent positive economic data has prompted speculation that QE withdrawal may begin as early as next year.
In the report’s base case, the orderly withdrawal of QE, which follows current guidance, is accompanied by a steady recovery in the economy and rising GDP and employment which underpin higher rents.
It is predicted that investors will increasingly seek opportunities outside London, and regional office yields will edge inwards as a consequence of competition. Conversely, London office yields are forecast to drift upwards from their current low levels, reflecting expectations of rising gilt yields.
However, in an early QE withdrawal scenario, an unexpected surge in economic growth in the near term is negated by asset reduction and interest rate increases. This chokes off the nascent recovery and results in much weaker GDP and employment growth, accompanied by higher gilt yields.
London would be more adversely affected than other UK cities because of its exposure to weaker international investment and demand. As a result, rental growth in West End and City office markets would fall back further than other UK markets.
London’s West End market is set to experience the sharpest slowdown, with rental growth being cut by an average of 1.7 per cent p.a. Likewise, rental growth in London City is reduced by an average of 0.6 per cent p.a. Rents in other UK cities would be relatively more robust, with growth falling by an average of 0.3 per cent to 0.4 per cent.
Richard Yorke, DTZ’s head of UK research, says: “Property investors should not fear QE withdrawal as ultimately it indicates a return to more normal economic conditions. However, although unlikely, investors should also be aware that any sharp pick-up in the economy which necessitated a more rapid withdrawal of QE could negatively impact the property sector, particularly in London.”