In view of the high inflation rate and an increasingly tight interest rate policy, investors on the real estate markets are cautious. However, experts also have words of reassurance.
Investment decisions are increasingly being postponed
“The housing markets are caught between inflation, a turnaround in interest rates, increases in construction costs, the need for new construction in the real economy and climate policy goals. In this period of uncertainty, some players are cautious and are postponing their investment decisions.” – This explains Michael Bender, Head of Residential at JLL Germany in a JLL press release. In July, the ECB raised the key interest rate for the first time in eleven years from 0 percent to 0.5 percent and now again in September to 1.25 percent. The inflation rate in the euro area was 8.1 percent in August. In a press release, the ECB announced in early September: “Based on its current assessment, the Governing Council expects to raise interest rates further in the next few meetings.” In the USA, the Fed has also increased the key interest rate to 2.25 to 2.5 percent, the consumer price index is 8.3 percent.
There are more variables in motion than ever before
That is why JLL Germany recorded significantly fewer large transactions in the first half of 2022 (H1) than in the same period last year: The five largest transactions in the residential real estate sector accounted for 30 percent of the transaction volume in H1 2021, in the same period of this year it was only 16 percent, i.e only about half. The consulting firm EY Real Estate also observes a similar reticence in the new trend barometer for real estate investments in the insurance industry 2022: “The trend of increasing real estate quotas from insurance companies, which has been going on for 13 years now, seems to be weakening,” says an EY press release – the insurance companies are among the most financially strong real estate investors. EY also writes: “For the first time, North America is replacing Europe as the most attractive investment destination.” This is due in particular to Germany’s dependence on energy imports from Russia. Oliver Schweizer, head of the real estate sector at EY Germany, explains the situation to Haufe: “There are currently more variables in motion than ever before.” In view of the scarcity of materials, delivery problems, a shortage of skilled workers and rising financing costs, many investments are being postponed or even canceled. According to the news site, the real estate consultancy Colliers estimates the number of new apartments built by the end of 2022 at 250,000 – instead of the 400,000 actually planned.
Bunds depress real estate valuations
Another factor is the high volatility of Bunds. Haufe quotes Sebastian Schneider, real estate analyst at Bayern LB: “The bond markets are very volatile because investors are very unsettled.” In his estimation, the sharp swings in yields would continue in the coming months as long as the consequences of the pandemic and the war in Ukraine have not been overcome. Timo Wagner, JLL finance expert, said something similar. The quake on the bond markets is also responsible for a movement in construction interest rates. These have more than tripled in recent months for ten-year financing. In its press release, JLL explains another effect of the increased yields on federal bonds: the first price corrections on the real estate market can already be observed, since the higher yields are having a negative impact on real estate valuations.
A slump is not yet foreseeable, instead the market is normalizing
But the experts also have good news. For example, the ECB expects the inflation rate to fall in 2023, JLL states that the market as a whole is still very liquid and that foreign buyers in particular are also very interested in German real estate in 2022. Haufe quotes Matthias Barthauer from JLL as saying that real estate investments have lost their attractiveness compared to government bonds, but investors are better protected against the consequences of inflation and leases for commercial real estate usually provide for inflation indexation. Haufe also quotes Katharina Heid from Heid Immobilien: “As a rule, rents also increase with inflation.” The higher rental income could be used wonderfully for the implementation of special repayments. And although the transaction volume for residential real estate in the second quarter fell by a third compared to the same period last year, according to Professor Steffen Sebastian (University of Regensburg), Peter Axmann from Hamburg Commercial Bank (HCOB) explained to Haufe in view of the changing real estate market: ” This is not a slump, the market situation is normalizing.”
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