Low inflation enhancing real rental growth

Improved real rental growth is a benefit of the slowing rate of inflation.

6th March 2015, words by Marie Hickey

 

■ UK inflation has been slowly falling below the Bank of England target of 2% since January 2014, helped by declining food prices and relatively weak demand. More recently, the shock of falling oil prices has raised concerns that deflation may take hold.

■ Mark Carney stated that inflation could temporarily turn negative in the spring because of falling oil prices. Yet, added that it would pick up again through the course of 2015 as the initial declines drop out of the annual comparison, subject to energy and food prices stabilising.

■ While persistent deflation is a potential risk to the UK economy, a period of low inflation does offer property investment benefits.

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■ Improved real rental growth is the more obvious benefit. All UK Property did not report consistent annual rental growth until September 2013. In real terms growth did not materialise until July 2014 as inflation remained above its 2% target.

■ The slowing rate of inflation, coupled with improving occupational markets over the second half of 2014, meant that the 2.5% annual growth in real rents reported in December was its highest level since July 2001. This is forecast to increase to 3.5% in 2015 in light of rental growth and inflation forecasts. Looking beyond the South East, the strongest rental growth markets are forecast to be Cambridge and Cardiff offices with real growth of 5.7% and 4.6% respectively.

 

 
 

Key Contacts

Marie Hickey

Marie Hickey

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 3320 8288

 

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