(Bloomberg) -- Rising borrowing costs and a cloudy economic outlook are starting to weigh on the property market.
There is upward pressure on yields for commercial properties in London, landlord Derwent London warned, meaning prices may fall. Some buildings in the capital that had been offered for sale have now been withdrawn, the firm said in a statement on Thursday.
The increase in interest rates means a “recalibration” of commercial property values is underway, Mark Ridley, chief executive officer at broker Savills Plc said by phone. After that, “I think we’ll see the market stabilize quite quickly.”
The property market is starting to slow as rising interest rates signal the end of the cheap borrowing costs that fueled a global property boom. War in Ukraine has sent energy costs spiraling, while global trade routes continue to be affected by the pandemic, contributing to inflation.
The UK is facing its longest economic slump since the financial crash, with inflation hitting a 40-year high. A number of big-ticket property deals have been pulled in recent months, including KKR and Mirastar’s attempt to sell 16 warehouses for more than £800m, according to media reports.
CBRE Group Inc. estimates there is £37 billion of potential demand from investors for London offices, a £3 billion decline since December, Derwent said.
In addition, some large tech companies have pulled back on expansion plans, Chief Executive Officer Paul Williams said in a statement. Still, “there remains a broad range of businesses with active requirements,” he said.
There has been a “particularly marked” decline in real estate investment market volume in Germany, one of the country’s whose economy is most vulnerable to the rise in energy prices, Savills said. The rising cost of debt is also causing home price inflation in the UK to slow, according to the broker.
Pretax profit at Savills fell 10% to £50.4 million in the first half, amid rising staff costs and lower advisory income from housing transactions.
“It is too early to predict with any accuracy the potential impact of the political and economic environment on real estate transaction volumes globally,” Ridley said in a statement on Thursday. “Clearly the risk is towards a short term reduction in activity as markets adjust.”
(Updates throughout with share prices, comments and context)
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