UK shares are on the march as the first interest rate cut’s finally here! To kick off August, UK interest rates dropped by 0.25% for the first time since inflation reared its ugly head, bringing them down to 5%.
Providing inflation doesn’t make a sudden comeback, more cuts could be on their way. And some forecasts are predicting them to fall to as low as 3% by the end of 2025.
Needless to say, that’s terrific news for businesses and consumers alike. But it’s a particularly strong tailwind for these two UK shares from my income portfolio that could now be on track to surge, even if I only had as little as £200.
Warehouses for the future
Londonmetric Property (LSE:LMP) and Warehouse REIT (LSE:WHR) have struggled in recent years, especially the latter. Despite occupancy and rental cash flows remaining strong, both companies have been under pressure from falling property prices. After all, higher interest rates triggered a cyclical downturn in the real estate market, even for commercial properties.
The companies are quite similar, with almost identical business models. They buy or build well-positioned warehouses and lease them to businesses that predominantly operate within the e-commerce space.
Londonmetric recently shook things up with its LXi REIT merger that expanded the property portfolio to include assets across the entertainment, convenience and healthcare sectors. Nevertheless, management’s core focus remains on the logistics industry. Meanwhile, Warehouse REIT is still prioritising urban last-mile locations.
Combined, they provide a wide spectrum of exposure to the logistics industry that continues to expand rapidly alongside online retail.
Impact of interest rates
As previously highlighted, higher interest rates have been quite an unfavourable headwind for these stocks. Since the start of 2022, their share prices have tumbled by 30% and 50% respectively. As the smaller enterprise, Warehouse REIT was hit far harder and even had to start selling off some properties to shore up the balance sheet.
But both companies are now in a seemingly strong financial position. And with interest rates finally going down, the pressure is being lifted. A lower cost of debt helps free up more cash flow, resulting in increased financial flexibility. It also paves the way for steadily recovering property prices and turning the recent headwinds into tailwinds.
Obviously, there are still risks to consider. If the Bank of England cuts rates too quickly, inflation could come back, derailing the recovery process and sending property prices back in the wrong direction.
Alternatively, a sudden slowdown in economic activity could also result in tenants being unable to keep up with rental payments, compromising cash flows and re-payment plans for their own debts.
Nevertheless, these businesses appear to be capable of navigating such disruptions. And providing goes according to plan, these shares could be in for a rapid recovery, delivering significant capital gains while simultaneously boosting dividends. That’s why I’m eager to start topping up my existing positions while prices remain low.
