Interest rates and property valuations are closely linked. This month, the Bank of England cut interest rates to 4.25%. It was the third consecutive cut since August last year and is a positive sign that we could now be entering a rate-cutting cycle.

Together with falling inflation (CPI at 2.3% in April 2025, per ONS), GDP growth returning, easing financial conditions, and renewed investor interest, a new outlook is being shaped for property valuations across both residential and commercial sectors.

The Bank of England’s shift in monetary policy is already filtering through to asset pricing and investor sentiment. As capital costs fall, real estate’s relative attractiveness improves, especially when combined with weakening returns from gilts and cash instruments.

For the residential property sector, the impact of lower interest rates was almost immediate. Nationwide and Halifax both reported positive monthly house price growth in Q1 2025, reversing the stagnation seen over the previous 18 months. Bank of England data shows mortgage approvals rose to 66,000 in March 2025, up 15% year-on-year.

This resurgence is driven by improved affordability through lower mortgage rates, renewed confidence among first-time buyers and movers and limited housing supply due to ongoing planning constraints and developer caution.

Regions with robust employment growth and infrastructure investment, such as the West Midlands, are likely to see stronger valuation uplifts than over-supplied or economically weaker areas.

In contrast, the commercial property market has been slower to react, but no less sensitive. Yield compression, previously reversed by rate hikes, is now back on the table for certain asset classes. According to the MSCI UK Monthly Property Index, industrial and prime city offices saw slight capital value increases in Q1 2025, while overall sector performance remains mixed.

Investment volumes are rising, led by cross-border capital re-entering the UK market. Investors previously sidelined by pricing uncertainty are now reassessing opportunities, particularly in urban logistics, prime offices and living sectors, including BTR, PBSA, and later living.

Lower rates are also revitalising development pipelines. Data from Glenigan and Barbour ABI shows an uptick in new planning applications, particularly in mixed-use and mid-rise residential schemes. Although construction cost inflation remains a factor, improved lending terms and yield expectations are bringing previously marginal schemes back into viability.

Bayes Business School’s UK CRE Lending Report (Spring 2025) notes that average debt margins have started to decline for senior secured loans, especially in the living and logistics sectors. This easing in the debt market is reducing refinancing stress and dampening the risk of distressed sales that had loomed over parts of the market in 2023/24.

While the direction of travel is increasingly clear, caution remains warranted. Political risk, global economic uncertainty, and sector-specific oversupply issues are still in play. However, the key message is this: lower interest rates are not just a financial phenomenon, they represent a strategic reset for the property market.

For developers, this is a moment to revisit feasibility studies and financing structures. For investors, it is time to reassess income return strategies and explore undervalued assets. And for valuers, recalibrating discount rates and risk assumptions will be central to staying ahead of the curve.