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Housing market, inflation and interest rates: Jeroen Belt and Lucas Luik of OIMIO provide their view on the current turbulent times


June 2022


About the impact on real estate markets and the response to rapidly changing market conditions


The housing market is at a standstill, inflation has not been this high in decades and what will interest rates do? Furthermore, the retail market is still adjusting to the change brought about by the corona crisis, but increasing vacancy rates in the office market are not. In this contribution, Jeroen Belt and Lucas Luik of property financier OIMIO give their vision of the challenges and how to deal with them as a property entrepreneur.

Jeroen Belt is clear: "I think that realising 100,000 homes a year is not realistic for the time being. Far from it, in fact. Belt is director and founder of OIMIO, the subsidiary of NIBC Bank that focuses on financing commercial real estate in the €2.5 to €15 million range. In that capacity, Belt and his colleague Lucas Luik, senior relationship manager at OIMIO, oversee the market.

Although Belt and Luik support the ambition of the current cabinet to build 100,000 new homes per year, the reasons why this will not be achieved are diverse. Belt: "Locations for large-scale new-builds are only available to a limited extent. Municipalities have limited capacity and are not prepared to reallocate sites to residential use or to allocate them at the right land prices.”

Costs have increased explosively

And yet the costs of realising housing projects are only increasing. Belt: "Construction costs have risen enormously. Look at the price increases of wood and steel, for example, but also energy and labour costs have risen sharply. Annual increases of 30-40% are no exception'. Belt fears that the costs have become so high that some projects are no longer interesting for developers and builders to start up at all.

These are problems that have been around for some time. The increased construction costs and availability of materials are not only a consequence of the war in Ukraine, but also a consequence of the production and transport problems caused by the corona crisis. OIMIO, too, has already seen projects become much more expensive due to the sharp increase in construction costs. How does the bank deal with this? "Having an open and honest conversation," says Belt. "Fortunately, in a recent case we were dealing with, we were able to provide additional financing because it involved a housing project where house prices had risen sufficiently."

Locking in risks

Luik: "For construction financing in general, it means that the risks have to be 'locked in' as much as possible. For example, do not purchase the land immediately if the destination is not yet clear, but try to get an option, possibly with a reassessment of the land price at the time of purchase. Fixing costs at an early stage can also help entrepreneurs. In a housing transformation project that we are financing, the developer has already purchased the entire installation. It can only be installed in a few months' time, but he has already set the price. That avoids surprises."   

But housing projects face even more challenges, according to Belt and Luik. Increasing regulation, for example. The government and municipalities are increasingly pushing to increase the stock of social rental housing, but compulsory owner-occupation and possible extension of regulation of the medium-rental segment do not stimulate new construction projects either.

Tensions in society

House prices have already risen explosively in recent years. The question of whether house prices have reached their peak seems to be answered in the negative. "The number of households continues to rise faster than the addition of new homes. An unhealthy situation, which now also has major social consequences. The disparity in wealth in the Netherlands is sharply increasing, between people who already own a home and those who are forced to rent and have no access to the owner-occupied market," says Luik.

The impact of the current high inflation rate should not be underestimated either. Belt: "Inflation will have a major impact on the entire economy." Inflation causes everything to become more expensive, so the value of money depreciates. That will normally cause interest rates to rise. Luik: "The 5-year interest rate has gone from below 0% to around 1.4% in a short time, and the trend is upwards."

Meanwhile, executives of the European Central Bank are already signalling that they will start raising interest rates in the near future, following the actions already taken by the US central bank, the Federal Reserve. Belt: "However, the ECB has a dilemma. On the one hand, it wants to curb inflation by raising interest rates, making saving more attractive than spending. On the other hand, it wants to ensure stability on the financial markets and, in order to do so, the southern euro countries must remain able to (re)finance their high government debts. In the 1970s to early 1980s, high inflation was combined with high unemployment. Unlike then, however, the labour market is now very tight, which means a clear risk of an upward price-wage spiral."


Real estate as an inflation hedge

At the same time, Belt points out that, despite the recent increases, interest rates are still historically low. Moreover: "In real estate financing, there is also always a lag in the way interest rate increases work through. There is a correlation between the risk-free interest rate (read: 10-year German government bund) and the initial yield on core real estate, but real estate remains an illiquid investment and prices react to interest rate changes with a certain delay. Moreover, real estate remains a good hedge against inflation, due to the indexation that is included in the lease contracts. The question is, of course, to what extent property owners will be able to pass on the current high inflation to their tenants."

That inflation, like the war in Ukraine, is now also making itself felt on a personal level can be easily seen from the sharp fall in consumer confidence. Since the CBS measured consumer confidence in the mid-1980s, it has never been so low. It is now even lower than during the credit crisis. Low consumer confidence does not automatically mean that people will buy less in the shopping streets, but it is a strong indicator. However, these are the same shopping streets that were hit hard during Corona.

Fewer shops, more logistics and a changing office market

Luik: "Just as during corona, the entrepreneurs who respond best to changes will have the best chance of survival. The changes that were initiated back then are still continuing. Fewer physical shops will be needed due to increasing online shopping. Transformation in the retail property market is necessary. At the same time, we see that the logistics market is benefiting considerably from this, with solutions for the last mile not yet having crystallised."

Not only in the retail market have the consequences of coronapandemas not yet been worked out, but also in the office market. Belt: "We think that offices will continue to have a function. Although people will be more flexible and work from home more often, offices will remain important as a place to meet and exchange ideas. We are also assuming that the office market will not shrink." But as in the other markets, flexibility will again play an important role. That is why OIMIO has already financed several providers of flexible office space.

Apart from the new uncertainties such as inflation and interest rates, OIMIO believes the pandemic will continue to play a role for the time being. Luik: "Corona is not over. In Asia, there are still countries in lockdown and we do not know if, and how, the pandemic will return."

Financing commercial real estate

How does the bank deal with this fast-changing and hard-to-predict world in their financing process? Belt: "We are swift. There is a short time between a financing application and the bank's decision whether or not to finance. Within four weeks of the application, the client can be at the notary's office. This short turnaround time gives the entrepreneur swift clarity and enables him to manage his risks better."

OIMIO can do that because it is a small bank, with a dedicated team. Lines are short and the process is simple, so decisions can be taken quickly. Belt: "Our funding comes from NIBC Bank and we have a strong ambition to grow. So our customers can count on us. Now and in the future."

Source: Vastgoedjournaal

De impact op vastgoedmarkten en het inspelen op snel veranderende marktomstandigheden

An initiative of NIBC Bank

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