Interest rate increases hit commercial market

Research by Savills, the property agent, shows that the index for commercial activity reached 58.2 in July, up from 56.2 in June. This is above the 50 no-change mark, but below the 59.6 average for the 19 months since the sector began expanding.

Mat Oakley, head of Savills’ commercial research department, said the lower growth rate was expected to continue, despite the decision last week to hold interest rates at 5.75%.

He said: “Concerns about the cost of money, and its effect on tenant demand, as well as development costs, continue to drag on development activity. We don’t expect to see a marked pick-up in activity or intentions until the base rate has been signalled as having reached a peak.” Rates are expected to rise 0.25% to 6% in the autumn.

Savills’ data indicates that the growth in the South-east, excluding London, was at its weakest since December 2005.

We don’t expect a pick-up in activity until base rates reach a peak

Mat Oakley, Savills

The expansion of private sector office activity was at its slowest for the year so far, measuring 54.7 compared with 56 in June. However, this was partly offset by a recovery in public sector office work, which bounced back from a decline last month with its strongest rise since March, reaching 52.9 on the index.

Overall, construction companies indicated a marked rise in public sector activity, which pushed up the performance of the sector from June.

Commercial developers said there had been a rise in work on public sector retail and leisure projects for the first time since March, although the latest increase in private sector retail and leisure activity was below its average for the first half of 2007. The three-month growth outlook for retail and leisure development and industrial and warehouse projects in July was the weakest for just over two years.