Inflation is a crucial economic indicator that affects various aspects of a country’s economy, including the commercial real estate market. In the UK, as in many other countries, inflation plays a significant role in shaping the dynamics of the commercial property sector.

Nick Mendes

Nick Mendes

During periods of high inflation, rents from commercial real estate often rise as tenants face growing costs. Commercial leases frequently include rent escalations tied to inflation rates, which means that landlords may benefit from an increased income stream over time.

However, inflation also pushes up mortgage rates as the Bank of England raises interest rates to control prices. This is one aspect among many for specialised lenders who will likely have multiple sources of funds to consider when pricing their products.

Although rising mortgage rates increase costs, they can also grow the gap between rental yields and borrowing rates for well-located, quality properties let on long leases.

Following an extended period of rampant repricing and product withdrawals, the commercial market has settled down.

Previously, lenders were controlling their flow of business by imposing high minimum loans – upwards of £1m. But a return to normal levels indicates that there is now both the capacity and the appetite to lend money, which is hugely positive.

Several peripheral lenders are also making moves to take a slice of the semi-commercial pie, with lenders such as Foundation Home Loans, MT Finance and Quantum moving into this space. Heightened competition can only be good news for the end consumer.

Generally, the outlook is positive. However not all assets are created equal. There are still concerns for small high street businesses and the hospitality sector, which are being reflected in lenders’ attitude to lend to them as consumers tighten their belts. Landlords may have to offer rent-free periods to retain tenants. Also, properties let on short leases or nearing lease events are most exposed. But for a dentist or a medical practice, there has never been a better time to buy your own premises.

Several lenders have recently loosened their criteria to take on more business. Commercial rates have also seen a slight fall as competition between existing and new lenders coming on to the market enter the fold.

As inflation starts to settle and hopefully heads on a downward trajectory, albeit not as quickly as hoped, towards the 2% target, the current base rate should gradually decrease, although it looks like it could take between 12 and 24 months to happen.

Moving into a new environment, tenants should regain pricing power as demand recovers. This will support rents and capital values and lower mortgage rates will then boost net yields.

It’s a good idea to research mortgage deals, look at different loan options and consider the various fees and risks – not just the introductory interest rate offered. Mortgage brokers can also help navigate the commercial mortgage market to source the best possible deals.

Specialist property finance comparison sites can also offer competitive commercial and business mortgage rates, including bridging and development finance, instantly online.

Nick Mendes is mortgage technical manager at John Charcol