Like the amen in church, financing belongs to investment real estate
As long as the return after costs is higher than the interest costs, the return on equity can be leveraged (leverage effect). Now the interest rates have been literally exploded, on 11.09.2024 the debut was still at a high level in view of the last 10 years. An adjustment in prices has slowly taken place over the last 24 months, the economist speaks of elasticity.
As inflation has come down, the ECB can cut rates, and so (on Thursday) we cut our policy rate by 0.25 percentage points after nine months of 4%.
Time to look at the limits of leverage – focus on the return on equity
Our presentation is based on fixed assumptions and does not represent a concrete analysis, but shows that it is still difficult for real estate investors to achieve attractive returns at the current price and interest rate level.
The mid-swap was around 2.4% on 11.09.2024 for a 10-year term. The most attractive financing offers are at a level of around 80bps.
Purchase factor up to approx. 20 times in positive leverage
The analysis shows that up to a purchase factor of approx. 20 times (5.0% purchase yield) – in the current interest rate environment – borrowing is advantageous. The exact amount depends, among other things, on the individual costs and expenses of the investment. In addition, as with any leveraged investment, the volatility and stability of cash flow should be assessed and taken into account when considering risk.
The number of real estate financing has declined significantly in the last two years. We have recently noticed that financiers have increased their risk margin. In addition, reference points from the market environment are missing, which means that the margins in the term sheets of the various financing providers have a wide variance. We counter this with a comprehensive tender for financing (tender procedure). In particular, alternative financiers, such as debt funds in the senior and junior loan segments, which have struggled during the low interest rate phase, can now make competitive and attractive offers.
