Agustín Carstens, general manager of the Bank for International Settlements, recently made the headlines when he warned that record global public debt means that governments, central bankers and investors need to “accept that interest rates may not return to the pre-pandemic ultra-low levels”. That’s probably no bad thing, as it could be argued that record low interest rates – initially assumed to be a short-term consequence of quantitative easing (QE) monetary policy – promoted a more lax attitude towards risk management and capital allocation.
It's strange to think that at one point the UK government was able to issue index-linked debt with a negative real interest rate return, a situation that was never going to persist. Unfortunately, when interest rates started to retrace there was no corresponding increase in economic growth, at least on this side of the Atlantic. So, we’re now in a position where the national debt is equivalent to a staggering £40,627 for every man, woman and child in the country. That amounts to a fairly hefty pachyderm in the room, meaning Carstens’ comments on interest rates are unlikely to produce much of a ripple effect.
Interest rate volatility naturally has a major bearing on activity in the real estate market. But valuations across the industry have been heavily influenced by changes wrought by the pandemic, most notably the switch to hybrid working practices and the accelerated take-up of e-commerce. Yet disruption was far from uniform, and investments in certain areas of the property market, such as logistics and student accommodation, have done rather better than others. By contrast, office landlords have often been forced to provide various incentives to tenants in order to keep rates relatively stable. So much leeway on rents was provided that in some cases the actual income received often fell at a faster rate than the headline rent figures implied – a distressing state of affairs, although occupancy costs for offices in the UK are a less crucial factor than in retail.