Why declining interest rates will not make a difference

Cheap leverage generally stimulates the economy while making real estate more affordable, but simply lowering interest rates will not be sufficient to boost the market.

The ECB finally wants to ease interest rates in 2025, and the industry is counting on it. But will the effect be enough to give the industry the long-awaited boost?

It is crucial to understand how to navigate the potential challenges in the real estate market to reach the save shores.

1. Consumer Confidence is still weak, and since lower interest rates do not directly address fundamental economic problems like unemployment, inflation, or declining wages, even with total compensation packages for levelling the inflation losses, consumers tend to save money rather than spend it.
2. Europe is not the US, and in challenging economic conditions, consumers are reluctant to take on additional debt, even if interest rates are low. Economic instability makes people risk-averse, choosing to hold off on significant financial commitments like buying property.
3. The wave of default loans and the new equity requirements from Basel III will lead to a significant shortage of real estate financing, especially for new developments.
4. Unlike the US or UK markets, the European market lacks value corrections. According to MSCI, the gap to stimulate the investment markets is still 40%, depending on the asset class.?
5. Construction Costs remain high, hence costs on materials and labour will limit new construction even with lower interest rates. This supply constraint keeps prices elevated and reduces the overall activity in the real estate sector.
6. Regulatory Pressures increase: The timeline from a building application to the building permit is still too long, and stricter regulations are already being introduced to encourage sustainable development.
7. The recent implementation of the CSRD is not be taking it seriously yet, while it's important to understand that rating agencies will adopt it as a common standard for their screening over the next years. This means that the industry needs to start preparing for the coming stress tests now.
8. 90 % of customers choose green products. But only 2.5 % of the product is ESG Compliant yet. According to Buildings Performance Institute Europe, 97.5% of the standing assets need to be upgraded on ESG Qualities and are not compliant with ESG principles yet.
9. The industry should have done its homework but still produced what it had made before. At the same time, customers' needs have changed. For example, VW had 20% of the Chinese automotive market, which declined to 2 % in only 2-3 years because it didn't adapt its product to changing customers' needs. The same will apply for real estate developers which do not adapt their products.
10. While tenants need flexible terms and conditions and space as a service, the industry ignores such demand and sticks with old-fashioned leases, which will not work in a time when change appears in much shorter cycles and becomes constant for all sectors.

In conclusion;

?While lower interest rates generally stimulate economic activity the expected boost for the struggling real estate market may fall short in 2025.

?Economic instability and additional roadblocks on the financial markets triggered by Basel III's stricter financing requirements because of a wave of non-performing loans ahead, will not allow the necessary returns on equity to stimulate the investment markets.

?High construction costs and regulatory pressures for sustainable development are also not helping.

??It's crucial for the real estate sector to adapt to evolving consumer preferences, particularly for ESG-compliant properties, flexible lease terms, and space-as-a-service models. This adaptation is not just a trend, but a necessity for the industry's survival and growth.??