Hold is not the same as stable for property investors
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While interest rates may appear stable for now, commercial property investors should not mistake a pause for permanence.
The Bank of England Base Rate has remained at 3.75%, but the direction of travel is upwards, and commercial property investors should be preparing for it now rather than reacting later.
Inflation is back. The Consumer Price Index (CPI), the Bank of England’s inflation metric, rose to 3.1% in August 2026 and continues to sit stubbornly above the 2% target. The cause is not domestic overheating but a supply-side energy shock: conflict in the Middle East has pushed oil above $100 a barrel and consequently dragged energy prices up with it worldwide.
Our central bank is something of an outlier in holding steady. The European Central Bank and the Federal Reserve have both raised by 25 basis points, to 2.65% and 3.75-4.00%, respectively. With no sign of the conflict easing, and some models predicting energy prices rising by as much as 24% in January, the mood here is upward too.
That matters for commercial property, for three reasons.
The first is debt.
Most investors borrow to buy and to refinance, and higher rates simply mean less capacity to service such loans. Some leveraged owners will find themselves selling into a market with thin sentiment, which may impact capital values.
The second is yields.
Investors weigh property against safer alternatives, and the UK ten-year gilt has reached its highest level since 2007, narrowing the gap considerably. Property carries extra risk and far less liquidity, so a premium is needed to justify it. As that premium is rebuilt, yields soften, and values follow.
The third is development.
Higher borrowing costs make schemes unviable, and projects are delayed or dropped. Perversely, that constrains future supply and supports rental growth. But it also takes real economic activity out of the system.
However, none of this is a reason to sit on your hands. It is a reason to be selective. Assets with genuine supply and demand fundamentals, secure income and real rental growth can absorb a higher cost of borrowing and still deliver over the long term.
I expect Grade A office and industrial properties to hold up well. Retail and secondary stock look far more exposed, just as they did through the last hiking cycle in 2023.
With the conflict showing no signs of resolution, the sensible course for commercial investors is not to wait for certainty that may not come, but to sharpen their judgement now.
Kevin Atkins is an associate in the Commercial Property team at Arnolds Keys.
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