Political risks dominate the market

The ECB signals an extension to the period of low interest rates. However, market participants are not focused on interest at the moment. Political risk represents a greater current risk – and not just in the residential real estate market.

The European Central Bank (ECB) wants to help the real estate industry. Although we think interest rates are low enough, and no market player ex- pects them to rise for the time being, it doesn’t hurt for those views to be confirmed at the highest level. As we have noted numerous times in past issues of the Market Radar, there is a risk of an economic slump in the euro zone. That has motivated the ECB to push ahead with its expansionary monetary measures, to support inflation. The only change is that it is using different instruments. In the real estate sector that means, in particular, that banks are receiving even more support from the central bank when issuing loans. Considering the current critical approach to risk assessment, we do not believe that will make it easier to secure a loan. But, in any case, it won’t become more difficult or expensive.

Current political interference in the real estate market is less welcome: rents in Berlin have been capped, they cannot be increased for existing or new tenancies. The cap does not take into account whether a rent is above or below the market rate, or how long it has remained unchanged. That creates opportunities to attack the new regulation, due to the blanket approach to clearly varied situations. That makes the legality of the instrument is questionable for a number of reasons, raising serious doubts about the legislative competence of the state of Berlin. We therefore expect that only a few landlords will observe the cap on rents. Investors nonetheless have a very sceptical attitude to Berlin – with regard to both new and existing properties. There are also concerns about the cap being extended to other states and cities. Recent developments mean political uncertainty is, and will remain, the greatest barrier to residential construction. There are also increasingly calls for rent controls in the commercial real estate market.

However, in a market economy, non-market solutions can only work for a short time. Limits and caps on rents may help leftist parties achieve success in coming elections, but this strategy has not been very successful for the SPD. Sensible regulation cannot currently be expected from the political sphere. That is why it is even more important that the real estate sector develop intelligent solutions. Deutsche Wohnen’s voluntary commitment to needs testing is certainly far more intelligent and efficient than anything suggested by politicians to date.

Interest rate development

At the start of the month, the ten-year interest rate swap stood at 0.33 percent and recorded a further significant fall to 0.20 percent over the course of the month. The six-month Euribor declined from 0.257 at the start of June to -0.311 at the end of the month. The three-month Euribor also decreased from -0.323 to -0.343 percent over the course of the month.

Outlook

One side effect is that long-term interest rates have again reached a historic low. The conditions for ten-year fixed interest rates offered by most banks have fallen by a further 10 basis points or more. Congratulations to everyone who had not previously fixed the interest rate on their long-term liabilities. But, from a risk perspective, it is finally time to stop betting on even lower interest rates. There is currently very little room for further decreases. The “forced option” of termination after ten years, at the latest, is a problem when it comes to long-term fixed-interest loans. For example, it makes fixed-interest loans with a term of 15 years unnecessarily expensive and complicated, especially for banks. Experience shows that this is less of an issue for alternative financiers, particularly life insurance companies.

Francesco Fedele CEO, BF.direkt AG

Prof. Dr. Steffen Sebastian IREBS