UK Construction prices and debt push up CRE costs

UK commercial real estate costs will increase more sharply than inflation this year, resulting in the widest margin since records began in 2013, according to our new CRE Cost Monitor. Our model suggests CRE costs will peak at 11.3% y/y in mid-2022, against a CPI of 8.6%, a margin of more than 2.5ppts. Costs will then fall back to 8.8% by end 2022, 2.2ppts above our inflation forecast.

What you will learn:

• Prices for materials were nearly 25% higher y/y in March 2022, pushing up construction output prices for both new development and property maintenance.
• The UK 5y swap rate is now more than four-times higher than a year ago at 2.1%, with loan margins also up 20bps by our estimates.
• Debt costs will have a gradual impact on portfolios, as maturing debt refinances at the current higher all-in interest rate.