The Bank of England has just reduced its base rate from 4.5% to 4.25%, a move that carries significant implications for those investing in real estate in the UK.
The economic context
Today's rate cut comes amid mixed economic signals. The BoE has seen substantial progress on disinflation over the past two years, allowing for gradual policy easing while keeping rates high enough to manage persistent inflationary pressures.
Key factors influencing this decision include:
Global trade tensions
The Bank recently warned that Trump's tariffs have created "material increase in the risks to global growth" and heightened uncertainty around inflation.Inflation outlook:
While inflation is expected to bump up to 3.7% mid-2025 due to energy costs and regulated price changes, the BoE views this as temporary with inflation returning to target thereafter.
Shojin CEO's reaction
Reacting to the news, Shojin CEO Jatin Ondhia commented:
"The Bank of England's decision to cut rates to 4.25% is exactly the momentum boost our property development sector needed. While global headwinds from Trump's tariffs are creating market jitters, this rate cut provides a solid runway for growth in UK property development. Smart investors won't be distracted by economic noise – they'll recognise that private credit opportunities in carefully selected development projects now offer an even more compelling risk-adjusted return profile compared to traditional fixed income investments."
Impact on property development finance
Lower borrowing costs for developers
The immediate effect is positive for property developers. Lower interest rates reduce the cost of financing new projects, potentially improving margins and making more developments financially viable.
Lower borrowing costs for homebuyers
The rate cut translates to more affordable mortgages for homebuyers, increasing purchasing power and potentially expanding the pool of qualified buyers. This strengthened demand supports property values and creates a more robust market for new developments, ultimately benefiting investors in development finance.
Development pipeline growth
With the market on track for 5% more property sales in 2025, developers are likely to respond with increased activity.
This expansion in the development pipeline creates more opportunities; investors benefit from the potential for premium returns as demand for capital grows, while also enjoying faster deployment that reduces idle cash and improves overall portfolio efficiency.
Changing risk-return profile
As conventional savings and fixed income products adjust to lower rates, private credit investments may become comparatively more attractive to investors seeking stronger returns.
Looking Ahead
Markets are pricing in further rate cuts, with expectations of the base rate falling to around 3.63% by early 2026 before potentially rising back to 4% by 2030.
Despite ongoing global economic challenges, the overall UK property market forecast remains positive. Most experts predict house prices will end 2025 in positive territory, with growth forecasts ranging from 2.5% to 4%.
For investors already participating in Shojin's property development loans, the rate cut offers potential benefits to existing investments. Projects that were funded at higher prevailing rates may now have improved margins, enhancing their financial stability.
For developments approaching completion, the combination of lower rates and improved buyer affordability will accelerate sales periods, potentially allowing for earlier exits and capital returns. This favorable shift in the interest rate environment may help strengthen the overall performance of the existing loan portfolio, particularly for projects that faced tighter margins in the previous higher-rate environment.
Conclusion
At Shojin, we see today's interest rate cut as creating favourable conditions for property development finance. With improved borrowing terms for developers and sustained demand for housing, the environment for fractional property development investments looks promising.
As Ondhia puts it: "This rate environment creates winners and losers – and those backing quality property development finance are firmly in the winner's circle."
While the overall outlook is positive, successful investing in this space still demands careful due diligence, diversification, and attention to the fundamentals of each development opportunity. Our team continues to focus on identifying the highest quality private credit opportunities in this evolving market landscape.