Investments in real estate are traditionally made with loans, the vast majority of which have a variable interest rate. Rising interest rates increase the cost of servicing loans and consequently reduce or eliminate the profit of the companies that own the properties.<\/p>\n
Already, internationally, the first effects are being observed, with many large companies that mainly manage commercial real estate showing losses. Trust Economics reports that soon the first cannons will be heard, and indeed from giant real estate companies on all continents, with the US and Europe first, of course, since the Fed and the ECB very aggressively increased their interest rates.<\/p>\n
Many investors have invested massively in real estate in recent years. They bought thousands of buildings which they renovated to rent out either as apartments or as offices, taking advantage of the low interest rates on loans and the willingness of banks to lend against the properties themselves, after carefully avoiding lending to other types of business activities for fear of red tape loans.<\/p>\n
Low interest rates could offer a rental return of 5%-7% to companies investing in real estate. But interest rates have already exceeded these yields and real estate companies that had borrowed 70% for the properties they were buying are already starting to see losses.<\/p>\n
Many are starting to sell some of these properties – renovated small apartments or offices – trying to take advantage of the high prices that are still prevailing. But as the rise in interest rates also affects potential buyers, demand is limited.<\/p>\n
Property prices are, according to industry investors, at their highest point in decades and are not expected to rise further. A widespread and visible decline has yet to set in as companies can still afford to own them, but if interest rates are not expected to come down soon, their stamina will run out and their shareholders will pressure them for returns. But the people cannot pay either higher prices or higher rents and the transactions of buying and selling are gradually freezing. Experts therefore predict a gradual reduction in prices.<\/p>\n
Other factors contribute to this, such as the very large increase in the cost of building materials, due to inflation and supply chain disruptions, the increase in the cost of construction work, also due to inflation, and the inability of tenants to pay high rents, since the their disposable income is falling – and that’s because of inflation.<\/p>\n
The general conclusion is that the trend in real estate prices is likely to be downward for the foreseeable future, i.e. for a few years from now. This trend cannot change unless mortgage rates are reduced, because until then there will be no demand from buyers. The combination of increased mortgage interest rates with the much higher construction costs of the properties will act as a deterrent to the decision to purchase a property.<\/p>\n
Things will get worse if the European Union insists on the implementation from 2024 of a relatively stricter fiscal policy, i.e. a policy of limiting economic growth and reducing deficits and debts. In this case, the potential buyers of real estate will decrease even more and the crisis in the real estate sector will intensify.<\/p>\n
What cannot be estimated at this time is how big the cost of the rise in interest rates will be for many companies that invested in real estate with the purpose of exploiting it. This depends on their financial strength and the percentage of loans in their investments. However, the “golden times” for real estate investors seem to have already begun to lose their luster.<\/p>\n","protected":false},"excerpt":{"rendered":"
Investments in real estate are traditionally made with loans, the vast majority of which have a variable interest rate. Rising interest rates increase the cost of servicing loans and consequently reduce or eliminate the profit of the companies that own the properties. Already, internationally, the first effects are being observed, with many large companies that … <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[163,19],"tags":[53,46,27,454,529,31,141],"class_list":["post-1544","post","type-post","status-publish","format-standard","hentry","category-corporates-businesses-industries","category-economics","tag-eu","tag-growth","tag-interest-rates","tag-investments","tag-property","tag-real-estate-market","tag-usa"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/1544","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/comments?post=1544"}],"version-history":[{"count":2,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/1544\/revisions"}],"predecessor-version":[{"id":1546,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/1544\/revisions\/1546"}],"wp:attachment":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/media?parent=1544"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/categories?post=1544"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/tags?post=1544"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}