The Economic Environment
It all depends on interest rates
Franz Pöltl FRICS
Managing Partner EHL Investment Consulting GmbH
The performance of investment properties has been characterised by high value appreciation and low cash flow for over ten years. With the rapid rise in interest rates which began in mid-2022, financing costs became the dominant topic on the invest- ment property market because the income generated by these properties was often no longer able to cover the interest and principal payments. The increase in key interest rates from zero
Recent information, among others supported by corresponding statements from ECB Council members, points toward mid-2024 as the most probable point in time for a first reduction in interest rates. If the ECB fails to meet these expectations, the situation will remain tense with fewer transactions and challenges for debt service.
New financing, in contrast, is connected with substantial hesitation: On the one hand, rents have increased notably due to the high inflation and related indexing and, on the other hand, purchase prices are in some cases 25 per cent below the former highs. The resulting higher yields are still not sufficient to make debt financing possible at the previous standard level of 75 per cent and more. The required equity component now normally lies above the 50 per cent mark. An analysis of the various market segments shows that – as is typical in challenging market situations – the lowest price declines have been recorded in the top segment at the best locations. Impressive proof is provided by two major sales from the portfolio of the bankrupt SIGNA Group, the Apple House on Kärntner Strasse and the Meinl House on the Graben (both in the 1 st District). These transactions reflect the strategy of high net worth investors, who are using the crisis to purchase properties that are unlikely to come on the market in “normal” times.
Stabilising prices and the return of investors on a significant scale can only be expected when the hoped- for interest rate reversal materialises.
per cent at the beginning of 2022 to 4.5 per cent in autumn 2023 led to soaring costs for owners and developers with variable fi- nancing. The impact on investors
with long-term loans has been less dramatic due to the clearly inverse interest curves, but new investments are now only conceivable with an above-average equity component. The fate of the investment property market is, as a result, highly dependent on the development of interest rates in the Eurozone. Stabilising prices and the return of investors on a significant scale can only be expected when the hoped-for interest rate reversal materialises.
On a positive note, the banks have been flexible in dealing with current financing and are prepared to search for solutions together with their customers to help them manage potential stress situations. This has, undoubtedly, played an important role in nearly eliminating the need for emergen- cy sales and allowing the market to remain generally stable in spite of the difficult climate with its very low turnover.
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Investment Property Report
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