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Rising interest rates and empty offices are increasingly becoming a problem on the global real estate markets.
In the UK, experts are warning of a “time bomb” as rising interest rates are forcing many homeowners into emergency sales. In Sweden, major real estate financiers are in trouble.
The situation in Germany is comparatively stable. Many homeowners are still protected by their fixed interest rates – until follow-up financing.
A time bomb is ticking on the real estate market: Due to rising mortgage interest rates, homeowners in Great Britain have to fear unaffordable costs. Emergency sales threaten. House prices are already falling. The risks are also growing in commercial real estate. In Sweden, large real estate financiers are in trouble. Rating agencies sometimes downgrade their bonds to junk status. In Germany, the real estate market is still quite stable. Here, too, internationally active companies such as the Aareal Group have to make high value adjustments. The time bomb is ticking.
The Bank of England is likely to raise interest rates again this Thursday. The 13th increase in a row is inevitable, said economist Suren Thiru in view of the high inflation. But a new rate hike means higher payments for homeowners who have to service mortgages, most of which have variable rates.
Experts expect the central bank to raise its key interest rate by at least 0.25 percentage points. However, a larger step of 0.50 points is not ruled out. The key interest rate in Great Britain is already at its highest level since the financial crisis of 2008. The tightening from almost zero percent at the end of 2021 to currently 4.5 percent is one of the sharpest in British history. And at 8.7 percent, inflation is still significantly higher than in the euro zone.
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The expected rise in interest rates would increase household mortgage costs by an average of £2,900 a year, the Resolution Foundation calculated. The increase will affect around 7.5 million households. The Institute for Fiscal Studies warns that 1.4 million hard-hit mortgage holders could lose a fifth of their disposable income because of the rate hike. A YouGov poll found that almost half of mortgage holders are already struggling with loan obligations and bills.
Prominent consumer advocate Martin Lewis called on the government to put pressure on the banks. Lewis said he spoke to Prime Minister Rishi Sunak about banks increasing their margins. “They raise mortgages, but not savings rates.” If interest rates continue to rise – Resolution expects six percent by mid-202 – many people would have to turn their finances upside down. “It’s going to be a nightmare,” Lewis said.
Owners are also concerned that house prices have fallen significantly. In April, a property cost an average of £286,000. That was £7,000 down on the September 2022 high, according to ONS.
Fixed interest rates still protect homeowners in Germany
According to the German Economic Institute (IW), real estate prices in Great Britain fluctuate more than in Germany. “The German housing market is resilient to sudden fluctuations in value. Conservative real estate financing with long fixed interest rates and high transaction costs are calming the market,” says IW real estate expert Michael Voigtländer. German residential real estate is more stable in value than in countries like France and the Netherlands.
Unlike in Great Britain, where real estate is usually financed on a variable basis, loans with fixed interest rates of 10 or 15 years are common in Germany. In the long phase with extremely low interest rates until the beginning of 2022, many customers secured long-term low interest rates. This keeps the burden low for many at the moment. According to analyzes by the specialist publisher Argetra, the number of foreclosures has fallen in recent years. Expert warnings of an increase in emergency sales have so far not come true.
The office market is dragging commercial real estate down
Commercial real estate is also threatened with adversity. Experts are currently looking primarily to Sweden. Rating agencies there have downgraded the creditworthiness of several large real estate financiers. The SBB, chews the Handelsblatt one of the biggest players in the commercial real estate market, then had to stop paying dividends and cancel a planned capital increase. The share price collapsed. Just a few days later, Moody’s also downgraded the Stockholm company FastPartner.
The business medium Bloomberg spoke of a growing list of “fallen angels” and warned that Sweden is something of a canary in the mine for Europe’s real estate market. If the real estate market in Sweden runs out of breath, other countries are also in acute danger.
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The German commercial real estate financier Aareal-Bank is also feeling the effects. Problems in the US office market could force higher reserves for possible loan defaults. The situation in the USA is “rather dark grey”, said Aareal boss Jochen Klösges.
“We’re going to have a few isolated cases in the US where we’re going to see higher risk provisioning,” he warned. The provisions for endangered financing may also be “significantly higher”. The board of directors of the Wiesbaden institute had forecast a range of 170 million to 210 million euros for risk provisioning in the current year. In 2022 it was 192 million euros.
The bank, which specializes in financing commercial real estate, does 90 percent of its business abroad. North America accounts for about a third. In the US office market, the bank recently had financing with a volume of 3.9 billion euros on its books. The problems stem from the fact that interest rates in the USA have risen even more than in the euro area. In addition, there is a pronounced trend towards working from home. However, Klösges emphasizes that in all other classes – hotels, shopping centers, logistics properties – there are “no signs of weakness at all at the moment”.
With material from dpa.
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I’ve been to a few foreclosures and was surprised at the prices they pay