The Economic Environment
There is light at the end of the tunnel
Any hopes of fast market recovery have been checked by inflation and interest rates – but the outlook is slightly more positive, at least for long-term oriented investors.
Interest rates are definitely not a trivial factor when it comes to investment property. However, even experts were surprised by the speed and scope of the approach taken by the ECB to fight the rapid rise in inflation by raising interest rates. Price increases are slowing considerably and the ECB will, hopefully, substantially reduce the pace of its interest rate hikes. For the investment property market, interest rates still pose the gre- atest challenge for the branch – at least over the medium-term.
these developments, there are reasons to expect the ECB will continue to raise interest rates at a moderate pace and end these activities in the second half of 2023. The investment property market – as well as the real estate market as a whole – has been generally cautious given the uncertainty over future interest rate developments. There are, however, grounds for optimism due to the continuing interest in top properties within the beltway and, above all, in the 1st District. These properties can draw enough potential buyers who are perhaps looking for a unique opportunity to upgrade their portfolios. The stabilisation of market prices is also expected to support the resumption of normal transaction activity in the broader market for “standard pro- perties“ at average locations.
„Debt financing is often impossible to explain “
Investment property traditionally generates little regular cash flow but does produce steady value growth, and the increase in interest rates has posed a challenge for some owners. The debt-fi- nanced acquisition of investment property is often impossible to explain at the present time: Interest expense is usually higher than rental income, and banks are demanding higher equity ratios and faster repayment for new loans. This constellation has led to a substantial reduction in transaction activity on the investment property market. In particular, the sale of investment properties for the short-term realisation of value appreciation has virtually come to a standstill. Optimism is, however, still justified over the long-run because the ECB is not only countering the high inflation with interest rate hikes but, as “collateral damage“, has also brought macroeco- nomic dynamics under pressure – and, as can be seen from the Credit Suisse debacle, banks can also be faced with enormous challenges. In view of
Franz Pöltl FRICS Managing Partner EHL Investment Consulting GmbH
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