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UK shares are fresh as the first interest rate cut is here! To start August, UK interest rates fell by 0.25% for the first time since inflation raised its negative rate, bringing it down to 5%.
Granted inflation doesn't suddenly return, further cuts may be on the way. And some forecasts predict that it will drop to 3% by the end of 2025.
Needless to say, that's good news for businesses and consumers alike. But it's a strong windfall in these two UK stocks from my current income portfolio that could continue to work, even if I only have £200.
Treasures of the future
Londonmetric property (LSE:LMP) and Warehouse REIT property (LSE:WHR) have been struggling in recent years, especially in recent years. Despite rental income remaining strong, both companies have been under pressure from falling property prices. After all, high interest rates have caused cyclical declines in the housing market, even in commercial areas.
The companies are similar, they have almost the same business model. They buy or build well-equipped warehouses and rent them out to businesses that are active in the e-commerce space.
Londonmetric recently shook things up with its LXi REIT merger which expanded its real estate portfolio to include assets across the entertainment, convenience and healthcare sectors. However, management's focus is on the transportation industry. Meanwhile, Warehouse REIT is still prioritizing last-mile urban areas.
Combined, they provide a wide variety of exposure to the ever-expanding logistics and online retail industry.
The effect of interest rates
As previously highlighted, high interest rates have been a negative effect on these stocks. As of early 2022, their prices have dropped by 30% and 50% respectively. As a small business, Warehouse REIT was hit hard enough that it had to start selling other properties to shore up its balance sheet.
But both companies are now in what appears to be a strong financial position. And as interest rates finally come down, the pressure is lifted. Lower debt costs help free up more cash flow, leading to increased financial flexibility. It also paves the way for a gradual recovery in property prices and turns recent headwinds into hurricanes.
Obviously, there are still risks to consider. If the Bank of England cuts rates too quickly, inflation could return, interrupting the recovery process and sending property prices back into disrepair.
Alternatively, a sudden drop in economic activity can also result in tenants being unable to keep up with rent payments, jeopardizing cash flow and debt repayment plans.
However, these businesses seem to be able to cope with such disruptions. And supply goes according to plan, these stocks may recover quickly, bringing big gains while simultaneously increasing profits. That's why I'm eager to start filling my existing positions while prices remain low.
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