Rising rates redefine real estate market


Global real estate professionals are facing much tougher conditions, as higher inflation and the end of near-zero interest rates make the sector’s formerly favoured position over other asset classes look far less certain.

“The problem is that we are not just facing one challenge, we are facing a bundle of challenges,” says Commerz Real CEO Henning Koch, who cites inflation, energy, the Covid-19 pandemic and rising interest rates as examples.


As the Germany-based asset management arm of Commerzbank, Commerz Real creates funds for institutional investors in renewable energy, infrastructure, residential, hotels and commercial property assets, and has about €35bn of assets under management.

According to Mr Koch, real estate is the “industry that feels the [higher] interest rates really heavily in comparison to other sectors”. He notes that “capital flight” to other asset classes, such as fixed income and corporate bonds, is resulting in real estate capital markets being “quite dead” at the moment. 

A report on 2023 global real estate sentiment, published on March 16 by the Urban Land Institute and PwC, says the industry is “extremely cautious” about current market conditions, with reluctant buyers and sellers unable to agree on pricing. In 2022, global sales of commercial properties fell by 21% from the previous year to a total of $1.1tn, according to MSCI Real Assets figures cited by the report.

Mr Koch says it is “impossible to sell right now”, as the market is frozen by the sudden change in economic conditions. “People who bought at land prices in the last 24 months, how can they deliver a proper return?” he asks.

Drying development pipeline

The biggest impact from the higher rate environment is on real estate development. Due to higher construction costs and uncertainty over whether properties will be sold at much lower prices, Mr Koch says smaller developers will “just collapse” if they can’t find cheaper sources of capital.


“The whole game is not working out right now. [Developers] are not in a position to start construction because the business plan is not working any more,” he says. He is “pretty sure” that the “development pipeline will dry out” in the near future, which will be a “disaster” for the German government’s residential building goals. 

In 2021, the country’s three-party coalition set a construction target of 400,000 new apartments per year that it is yet to hit. In January 2023, housing minister Klara Geywitz said that the target would be achieved in 2024 at the earliest.

For the current tricky situation to abate, says Mr Koch, something needs to change, such as a drop in land prices, a fall in construction costs, or for the exit rates — the resale value of real estate assets — to return to the higher levels seen in recent years.

“I’m sure one of these elements will adjust. It’s a matter of bringing a bit more certainty into the market,” he says, noting the doubt over the interest rate decisions made by central banks such as the US Federal Reserve and European Central Bank.

Banking turmoil

While many in the real estate industry are hoping for interest rates to peak in 2023, the recent turmoil in banking has raised questions about broader financial stability. Mr Koch believes this turbulence — including the collapse of US tech-focused Silicon Valley Bank and the downfall of Swiss giant Credit Suisse — is a “completely different situation” to the global financial crisis of 2008. 

“I think the Fed will continue this straightforward plan to fight against inflation. Situations like Silicon Valley Bank will not really impact their principal decisions,” he says, adding that inflation was the most pressing problem to be tackled.

“If we see a systematic financial crisis, it’s a different thing [but] I think we are far away from seeing that,” he concludes.

This article first appeared in the April/May 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.

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