The UK slipped into deflation for the year to April 2015. This prompted property expert Simon Morris to ask; is deflation a threat to the UK commercial property market?
UK falls into deflation
Economists have been concerned that the UK would fall into deflation for some time. Inflation measured zero on the consumer prices index (CPI) for both February and March. The latest data shows that it has finally happened; the CPI slipped 0.1% in the year to April 2015, according to the Telegraph. This has prompted fears that investors will under-invest in the UK commercial property market due to a fall in consumer demand.
Deflation isn’t a threat to commercial property
A recent piece on Property Magazine International argued that deflation, at least in this case, is not a threat to the UK’s commercial property market. The article indicated that deflation has been caused by the global oil price fall and not a decrease in consumer demand.
This argument was supported by leading global real estate adviser DTZ. They pointed out that take-up office space climbed to almost 20 million square feet in the main UK markets in the past year and that activity is expected to remain robust in the year ahead.
The global property company also noted that commercial property in the UK will be able to safeguard its appeal to investors. This is because the Bank of England is using deflation as justification for delaying interest rate increases, which means it’s feeding through to lower bond yields and forward rates. Therefore commercial property has maintained its attractive income yield and scope for capital value uplift.
Deflation may be “positive for the property market.”
DTZ and Property Magazine International make a strong case. The evidence suggests, as Fergus Hicks, the head of global forecasting at DTZ put it, mild deflation could be “positive for the property market.” Therefore going forward UK commercial property could prove a lucrative asset management plank for investors across the country.
Yet Simon Morris would suggest that investors practise caution. Deflation is unpredictable and we have no idea how long it’ll be before the UK rises back into inflation. Simon would suggest that potential investors take a look at his free property investment guide for 2015 before making any decisions over whether to invest in the UK commercial property sector.