The fast increase in interest rates is still being digested

The fast increase in interest rates is still being digested
Antonio Simontalero

Only one year ago, Euribor was still negative and continuing the trend of the previous seven years, in which reference rates remained at abnormally low levels. However, during the second half of 2022, Central Banks have been taking measures in an attempt to control the rapid increase in inflation, recording reference rates unseen since 2011.

This fast increase in rates is still being digested by the real estate market. When analysing the impact, we should make a distinction between the effects in the operational performance of the assets and the effect in capital markets. In relation to the operational performance, most of the sectors are still performing well. So far, operational KPIs remain solid and above pre-covid levels: occupancy rates remain high and tenant demand is still strong. This is specially the case in the best performing and more core assets. However, we are already observing a slowdown in economic activity, and we should expect a deterioration in KPIs if high inflation remains or if unemployment increases.

The picture is very different when we look at the capital markets. In this case, the effects have been much faster as financing costs have rapidly reflected the increase in interest rates. This had an immediate impact on transactions due to the need of investors to revisit their underwriting assumptions. As a result, we should expect yields to increase until prices are rebalanced and reflect realistic expectations for both buyers and sellers. The duration and depth of such price adjustments in Iberia is still to be determined and can differ by sector, as low yielding sectors will likely be more affected than those in which values had been already adjusted during the last years.

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