What Does the Interest Rate Rise Mean for Proptech?

The Bank of England has increased interest rates from 1.25% to 1.75%, the biggest increase over the last 27 years, in order to try and tame inflation. You may have seen descriptors of how this will impact the wider economy, savings, and mortgages. But how does this impact the clients we work with, and the PropTech sector?

WHAT ARE INTEREST RATES?

The technical name for the rate raised today is the ‘Bank Rate.’ This is set by the Bank of England and impacts the level to which all commercial and high street banks set their individual interest rates at. Essentially, the Bank of England has the authority and the power to set how much the cost of borrowing is, and the benefits of saving.

WHAT IS INFLATION?

Inflation, normally measured as Consumer Price Index (CPI) in the UK (and sometimes Retail Price Index or RPI) is the data taken from a survey by the Office for National Statistics (ONS) which measures the cost of a basket of goods and services (such as food, clothing, transport, bills, restaurants etc) and compares it to the year before. If inflation is 5% for instance, that means a nice pair of jeans that costs £105 now would have cost £100 a year ago. The ongoing impacts of Covid, Brexit and the Russian invasion of Ukraine are three key factors impacting inflation in the UK today.

HOW DO INTEREST RATES COMBAT INFLATION?

Going back to the Bank of England’s power and authority - they are independent from the Government, but have considerable influence over the country’s economy. Raising interest rates as they have done today is an attempt to encourage Brits to put more away in their savings accounts (which will benefit from a higher rate of interest), whilst encouraging them to borrow less (as higher interest rates will increase the cost of loans and variable rate mortgages) and spend less (higher interest rates increasing credit card repayment fees).

In theory, with less demand for goods and services, prices will drop - at the risk of causing damage to the wider economy and inducing recessions, which the Bank itself warned was likely today.

WHAT DOES THIS HAVE TO DO WITH PROPTECH?

Plenty. Many of the companies we work with are small, growing firms that may have just launched or require continual investment to grow their business. Pre 2008, it was much easier than today to persuade a bank to loan money to start businesses, although much stricter regulation following the global financial crisis has restricted banks as a source of debt.

Part of the rise of venture capital firms and private investors throughout the 2010s and 2020s is because of this restriction - suddenly entrepreneurs were having to tap other sources of investment, and investors were romanced by the wild success of companies that saw lightning growth and enormous returns on original investments.

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IS THIS THE FIRST REAL TEST FOR THE PROPTECH INDUSTRY?

Since 2008-09, we haven’t faced a major global recession, with even Covid having a limited impact due to the enormous amount of money that was being created and pumped into the economy. With the pandemic easing has come the economic reality of this quantitative easing though - magnified, some might say deliberately, by Putin and Russia’s invasion of Ukraine pushing up food prices.

PropTech companies now will likely discover that finding investors, and persuading those investors they find to part with their cash, will be considerably more difficult. With a recession looming - or already here - many investors will put their money into safer assets, such as savings accounts, physical real estate, gold, bonds or safe stocks. Those companies that already have debts will find the cost of paying them back will increase, pushing those who haven’t built the revenues to cover those debts to the edge.

IS IT ALL DOOM AND GLOOM THEN?

Well, to be realistic, not all, but a little. However - recessions and low times for the economy are often the greatest opportunities for the very best companies to rise to the top. Our own client Coyote Software was born out of M7 Real Estate, which was founded in 2009 and from day 1 prioritised the use of tech in sourcing and building their real estate portfolio; the team that developed the tech was spun out in 2016 to become Coyote.

Across the proptech industry we see a lot of companies that do the same thing - an office management platform, an app for quick leasing, a way to find properties better. Even if we weren’t about to head into a recession, the amount of companies with similar products isn’t sustainable in the long run, as there simply aren’t enough customers for each company to succeed. Instead what we’ll likely see is the cream rise to the top, and the companies with the best products, marketing, PR, and innovation will be the ones to succeed, particularly if their product helps cut costs in a time of recession. This will slim down the sector in terms of numbers of companies, but boost it in terms of overall market size and value.

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AND FOR US?

Opportunities abound. Whilst some of our clients may face harder times, the importance of getting their voice heard is paramount; to find investors, to find clients, to solidify their market presence. Recessions are the most important time to make a noise and prepare for better days - and that’s our job!

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