Savings: Inflation and high interest rates worry real estate investors

Real estate prices have ballooned during the pandemic. Higher interest rates may allow some air to escape from the balloon. Savills agency included in the FTSE 250 index, which reported a 10% decrease in interim core earnings On Thursday, he says real estate markets are beginning to adjust.

This is a particularly accurate formulation. Real estate agents rarely use vulgar language. But it is clear that investor confidence in the commercial real estate market has been damaged by the war in Ukraine and inflation, as well as high interest rates. The cost of five-year fixed-rate debt has risen 200 basis points to 4.25 percent over the past year. Sellers will need to accept lower prices to resume making deals.

The prospects are bleak for large parts of the office market that will not comply with environmental regulations. Compliant buildings that command higher rents will continue to attract investors who have increased their allocation to alternative assets.

Savill’s shares suffered a double-digit drop in meager holiday trading. But the business is confident in the resilience of the residential property market, and expects prices in the UK to stabilize, not fall. It hopes that any slowdown in transactions will be short-lived. Wealthy clients are more likely to be cash buyers, and therefore are less directly affected by higher mortgage rates.

With shares trading at multiple price/gains just below their long-term average, shareholders haven’t given up on Savills yet. But a lot depends on interest rate expectations. Capital Economics, which expects rates to peak at 3 per cent – more than most forecasts – is seeing a 7 per cent fall in UK house prices over the next two years. Housing deals are expected to fall to their lowest level in more than a decade next year.

Real estate agents are rotating companies. At least, Savills has reduced its pre-financial crisis reliance on transaction-based earnings, dropping from roughly half of sales 15 years ago to about 40 percent. However, Savills will feel dehydrated if the property’s coefficients wear off.

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