Market at a turning point
The economic outlook has changed dramatically in recent months. The high inflation has prompted the ECB to increase its key interest rates sooner than expected, which inevitably has an impact on the real estate market. Whereas CBRE initially estimated total investment volume to reach €20 billion in 2022, we are adjusting this to €18 billion. There are two reasons for this 10-percent decline. For one, the higher interest rates are affecting prices in the commercial real estate market, which are down marginally. In addition, the proposed regulation in the rental market is causing significant uncertainty among investors. They have no way of knowing the potential impact on their operations and are currently not acquiring any new developments within the mid-market.
High inflation impacting the economy Inflation rose precipitously at the start of the year due to a combination of increased consumer spending and supply-chain issues. The growing demand for specific products coupled with a lower supply delivered a strong economic boost. The war in Ukraine has upended the world as we know it, with the current geopolitical situation having further fanned the flames of inflation. Inflation is at an all-time high worldwide, including in the Netherlands.
Outlook for key economic parameters
Source: CBRE Research
The Fed has therefore intervened in monetary policy, and the ECB has followed suit, having decided to raise its interest rates for the first time since 2011. As the Federal Reserve’s past experience shows, this will not immediately affect inflation numbers: while the Fed raised its interest rates in March, by May inflation remained at record levels (8.6%). This means the ECB policy will not be reflected in inflation numbers before sometime this autumn. Inflation is expected to fall to moderate (and responsible, by ECB standards) levels in mid-2023.
Meanwhile, the effects of inflation are becoming evident across the economy. The combination of persistently high inflation and historically low consumer confidence is affecting consumer spending; this will be further intensified once consumers start noticing the impact on their savings accounts. Nevertheless, CBRE is expecting the Dutch economy to grow by 2.7% this year, which will then slow down to +0.2% in 2023. A brief recession cannot be completely ruled out, which
is hard to reconcile with one aspect of the current Dutch economy: job security is at an unprecedented high. The recent interest rate increases have not caused a spike in unemployment; in fact, they should restore the balance between labour demand and labour supply. This prevents wages from increasing and, by implication, stops a wage/price spiral.
Record-high interest rate increases in the financing market Whereas consumers are starting to feel the pinch of inflation and interest rate policies only gradually, the situation is different in the financing market, where loan interest rates have increased to historic levels over the past six months. Mortgage interest rates stand out in particular, having increased by more than 200 basic points during this period. CBRE is noting a similar trend in the commercial real estate market, even though margins there have remained unchanged. The only difference is that interest rates are currently higher and that financiers are becoming more selective in terms of the types of transactions they enter into.
Both the expected interest rate increases and the current inflation numbers are likely already fully allowed for in the existing interest rate levels. If actual interest rates further increase in July and September, this therefore need not necessarily result in higher loan interest rates. Consequently, CBRE expects interest rates to stabilise around their current level and that the real estate market will slow down as a result. However, we acknowledge the fact that the future remains highly uncertain.
Continued high demand for real estate investments Despite the uncertain economic outlook and higher lending interest rates, the investment market remains highly dynamic, with investment volume reaching €7.3 billion in the first six months of 2022 – up 32.5% from the same period in 2021. Investment demand remained consistently high, with one of the contributing factors being investors’ search for inflation-hedging assets. Investor sentiment therefore remained unchanged, despite the ongoing war in Ukraine and the higher interest rates.
Investment volume in the commercial real estate market during the first six months
Source: CBRE Research