The Bank of England’s 0.5 per cent interest rate increase will potentially lead to a downward adjustment in property prices, which could open up opportunities for Middle Eastern investors, experts have said.
“The interest rate hikes in the UK were expected, in line with global markets, and with continued inflation, further interest increases are anticipated,” said Alex Casaki, head of the London desk at property consultancy Core.
“As the cost of borrowing increases, potential adjustment in sales prices, coupled with a strong dollar, will present further opportunities for Middle Eastern real estate clients who are less dependent on lending.”
The BoE raised interest rates from 1.25 per cent to 1.75 per cent on Thursday, the largest increase since 1995, and warned of a looming recession.
The bank’s Monetary Policy Committee made the widely-expected decision as part of attempts to bring inflation under control.
It has been criticised for moving too slowly to combat inflation, which currently stands at a 40-year high of 9.4 per cent, forced upwards by rising food and energy prices.
It is the sixth consecutive increase in the bank rate since December and the biggest individual leap in 27 years. The previous five increases had not been more than a quarter point.
The British pound has weakened more than 10 per cent against the dollar this year as rampant inflation, a weakening economy and the Russia-Ukraine conflict have encouraged investors to sell the currency.
Increasing interest rates have a dampening effect on asset markets in the near term, especially for investors who have mortgages and those dealing with the challenge of rising inflation, said Sameer Lakhani, managing director of commercial lender Global Capital Partners.
“For international investors, especially at the higher end of the market, the impact will be lower and greater emphasis will be placed on the exchange rates,” Mr Lakhani said.
“Nonetheless, as the BoE has indicated, that there is a high likelihood of a recession ahead. Real estate prices will moderate, especially after the extraordinary run up that they have had in the last year.”
UK house prices dropped by 0.1 per cent, month on month, in July, marking the first decrease in more than a year, according to mortgage lender Halifax. They had risen by 1.4 per cent in June.
Leading indicators of the housing market have recently shown a softening of activity, while rising borrowing costs are adding to the squeeze on household budgets, said Halifax managing director Russell Galley.
“Some of the drivers of the buoyant market we have seen over recent years — such as extra funds saved during the [coronavirus] pandemic, fundamental changes in how people use their homes and investment demand — still remain evident,” Mr Galley said.
“The extremely short supply of homes for sale is also a significant long-term challenge, but serves to underpin high property prices.”
Real estate company Zoopla said this week that house price growth in the UK will come to a halt if mortgage rates hit 4 per cent, with values expected to dip if rates climb above that level.
Mortgage lender Lloyds Banking Group also said last week that it expected house prices to fall by 1.4 per cent next year.
The increase in interest rates in the UK could also lead many international property investors to consider exiting the market as they look for opportunities elsewhere in the world, in places such as Singapore, Zurich and Dubai, according to Rosie Patterson, mortgage channel manager at property broker Better Homes.
“Once they realise Dubai offers exceptionally low property prices per square foot, compared with the most iconic cities, as well as an average gross rental yield between 5 per cent and 9 per cent, we will see an additional influx of international buyers,” Ms Patterson said.
“Dubai’s property market will continue to see an increase in Arab and international investors and be the lead benefactor of millionaires relocating from across the world. Dubai offers high-net-worth investors prime real estate with all the top amenities at four times less the price compared with other leading capital cities, making the city desirable for investors across the globe.”
Looking ahead, further rate increases will have a "crippling effect" on the general UK population, leading to over-extended financial commitments, which in turn could trigger a recession and bring down house prices and rents, according to Lewis Allsopp, chief executive of Dubai real estate broker Allsopp & Allsopp.
“As a result, it would make sense for Arab and international investors to diversify their investment strategies into buying in their local markets where sentiment is strong and offers a better return on investment,” Mr Allsopp said.
“Long term, the UK always offers great investment through property, but in the current climate, I would suggest letting it cool down before jumping in at the top end and picking up some better-priced options once the market has settled.”
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Inside former Gucci HQ as $66.6m London mega mansion goes on sale
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The former office of former Gucci chief executive Domenico De Sole. All images courtesy Beauchamp Estates/Tom St. Aubyn Photography -
The house contains its own health club with sauna. -
The former Gucci boardroom. -
Grafton Street in London's Mayfair. -
The kitchen is state-of-the-art. -
The property was substantially refurbished. -
Elements of grandeur remain. -
The house is on the market for £55 million. -
Domenico De Sole's former office is now part of the penthouse suite. -
A VIP bedroom suite. -
The house has its own gym. -
The library in the Grafton Street property. -
There's a mosaic lined steam room and a Scandinavian style sauna. -
The bathrooms have top-level finishings. -
The indoor swimming pool. -
The kitchen comes with a breakfast bar. -
The main reception room and Tom Ford's former office. -
The sauna. -
Tom Ford's former office. -
A sweeping staircase connects the levels. -
The house has a passenger lift. -
The drawing room offers optimal comfort. -
Domenico De Sole's former office. -
The VIP bedroom suite.
