The author would like to thank Amelia Horgan, Chris Hayes, Mathew Lawrence, Sarah Nankivell and Sophie Monk for their comments on this paper.

In August, the Bank of England cut interest rates for the first time since 2020. The Bank’s key rate was lowered by a quarter of a percentage point to five per cent, a modest decrease in empirical terms yet significant as a signal that the worst of the inflationary era may be past us. Other central banks around the world, such as the US’s Federal Reserve and the European Central Bank, have also cut their rates in the past few months and, consequently, have lowered the cost of borrowing.  

In the context of the UK housing market, the Bank’s decision paired with Labour’s landslide victory in July has given a boost to the share prices of publicly traded housebuilders^[1] as both events potentially mark a newfound period of stability^[2] and improved market conditions.^[3] However, many homeowners continue to wait with bated breath for better borrowing terms as more than three million households are on fixed-rate mortgage deals with interest rates below three per cent, with most of these borrowers needing to refinance by the end of 2026.^[4]  The Bank of England’s governor, Andrew Bailey, has briefed the press that interest rates will not continue to be cut drastically or quickly in order to prevent inflation from spiking again.^[5] “Don’t expect we’re going back to zero,” he said, “because zero was the product of huge global shocks. We’ll be lower than we are today, but I think it’s very clear that we’re not going back to zero.”^[6]

The end of the era of cheap credit which defined the 2010s will come as unwelcome news to another coalition of actors who are particularly sensitive to interest rates: institutional investors. These financial firms include asset managers, pension funds, insurance companies and university endowments and they have become increasingly active in global real estate markets, including the UK.

[.fig][.fig-title]Institutional Investors Managed Over $1.7 trillion Worth of Global Real Estate in 2023[.fig-title][.fig-subtitle]Global real estate assets under management by institutional investors, $ billion[.fig-subtitle][.fig]

[.notes]Source: Common Wealth based on Preqin.[.notes]

Institutional investors are heavily dependent on credit provided through bank loans to complete deals and acquire real estate assets and companies. The institutional investment industry flourished over the 2010s due to the dual impacts of cheap borrowing and hefty regulation of traditional banking institutions, limiting their growth.^[7] At the onset of the Global Financial Crisis of 2008-09, institutional investors had $385 billion worth of real estate assets under their management (Figure 1). By the end of 2023, this figure had swelled to $1.7 trillion, representing a roughly 450 per cent increase over just 15 years. While the value of real estate assets managed by institutional investors remains marginal to the total value of the global real estate market (0.5 per cent of $379.7 trillion),^[8] the massive growth in value of these assets over a brief period of time has thrust them out of the shadows of Wall Street and onto the centre stage of the global financial system.  

Institutional investors have been in a state of suspended anticipation brought about by the prolonged inflationary context. Since higher borrowing costs eat away at profit margins, fund managers who direct the deployment of capital committed to their funds and sell existing assets have waited for the optimal investment conditions to drive the largest returns. Over the 2020s, dealmaking and aggregate deal size for institutional investors in real estate assets reached their peak in the fourth quarter of 2021 at approximately 3,000 transactions worth a total of $145 billion (the last quarter before the Russian invasion of Ukraine). Since then, transactions have been cut by more than half to an average of roughly 1,400 transactions per quarter with an average quarterly aggregate deal size of $75 million (Figure 2). The present borrowing conditions have caused an accumulation of “record amounts of unspent investor cash and an unprecedented stockpile of ageing deals,”^[9] with time ticking away rapidly before the cash must be returned to investors according to the terms set in the investment funds.

[.fig][.fig-title]Deals Have Begun to Slowly Recover from the Rate Hike Cycle[.fig-title][.fig-subtitle]Dealmaking in global real estate assets by institutional investors[.fig-subtitle][.fig]

[.notes]Source: Common Wealth based on Preqin.[.notes]

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