TO STAY”

The link between interest rates and real estate prices hinges on the ‘discount rate’ (disconteringsvoet), a percentage used to calculate the present value of future cash flows. The discount rate is based on the interest rate. If interest rates rise, that has huge implications for investors, because it makes borrowing more expensive. And that weighs on their real estate budgets.

Out of balance

Not so long ago, borrowing was practically free. Investors were banking on rates of around 1.5 per cent, compared to 4.5 per cent or higher nowadays. “The real estate market is out of balance”, Roel sums up. “Real estate buyers are factoring in the new rates, but many sellers can’t and/or don’t want to yet. That has put a damper on transactions and the volume of investments.”

Roel predicts that if interest rates stay at the current level or go even higher, which is what current ECB policy suggests will happen, sellers will automatically start lowering their prices. They’ll have to, if they want buyers to bite. “The market will remain turbulent this year for sure, but we’ll reach a new equilibrium.”

Pleasure and pain

Historically, interest rates are still far shy of old records. The problem as such is not so much the height as the speed at which rates are rising. “Some real estate sector players have relatively short-term investment horizons. If you bought a building two years ago, it might be worth less now. So they’re feeling the pain of this interest rate increase, but then they also experienced the pleasure of interest rate decreases for many years.”

Shift towards prime locations

The property market has a large number of submarkets, including housing, office, retail and commercial real estate. Rising interest rates affect each of these sectors differently. In the office market, Roel says he has already noticed some shifts. Demand for less desirable office locations is waning as prime locations become more popular.

“Second-rate office locations are the first to have taken a hit from the drop in office demand, resulting from hybrid working. That doesn’t include Zuidas, of course, which is one of the best. When I step outside and see how much talent is concentrated here and the positive vibe of this place, I’m fully convinced that Zuidas is here to stay.”

Sustainability

As of January, office premises are required to have an energy label of ‘C’ or higher. Many office owners are actually aiming substantially higher. Roel expects sustainability will become a key differentiating factor for real estate value. “Sustainable properties will quite likely devalue less or even increase in value over the next few years. Sustainability is becoming the norm. All banks are also endorsing it in their financing policies. Sustainability is a huge priority.”