Investing in real estate with interest rates going up?

Hi all,

I'm thinking about getting into real estate in my home country (Eastern Europe).

Just to give you a general overview of this market: inflation is sky high (not €) and interest rates have already started going up so it might be the last chance for me to get leverage at these rates.The issue is that I see interest rates going even higher in the future, which should at some point push down inflation (so far no success), which theoretically would mean that:

  • Rental cash flows will come down or at least stay the same since rent correlates with inflation

  • Discount rate will go up since interest rates will go up.

These two points would mean that the value of real estate will go down.

Any thoughts?

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Comments (6)

Nov 24, 2021 - 8:44am

Edit: my view is US centric and the bond market in your Eastern European country might be completely different:

I think humility is important when predicting macro events because nobody knows. Given your outlook, either you're wrong or the entire bond market is wrong. Being a contrarian and right is immensely profitable and difficult. Long term if the real estate is a scarce good with rising demand and positive carry cost you'll be good, short term if inflation pushes faster than anticipated interest rate raises then real estate values (along with most of the market) will tank and over-leveraged borrowers will get crunched

  • Director in RE - Comm
Nov 24, 2021 - 8:55am

If you look across countries, in historic periods where interest rates rose by over 100 bp in a 12 month period, the prices then grew by 5% over the next year. 2% during the second year.

  • NA in IB-M&A
Nov 24, 2021 - 9:15am

That's interesting and pretty counterintuitive. Any thoughts on why that is?

I would have assumed that there is a positive relationship between RE prices and inflation and a negative relationship between RE prices and interest rates.

  • Director in RE - Comm
Nov 24, 2021 - 12:01pm

Interest rates are increased when central banks are trying to reel in a hot economy. Even if cap rates rise due to rising rates, if rent growth, and occupancy levels are really strong, they can overcome the higher cap rate and still have price growth.

Most Helpful
Nov 24, 2021 - 12:34pm

^This. However, it depends entirely on what you're buying. Anything with shorter leases, think multifamily, hotels, etc, will do fine because in a good economy they can raise ADR, rents, etc. However, if you bought a 20 year NNN lease asset for a 4 cap, your gonna take a severe hit unless those annual escalations are huge. Same applies to office and retail with longer leases. The longer the term, the more risk as it gets closer to being looked as a bond. RE doesnt take much of a hit. Maybe in some cases prices will stop running up. However, the stock market and bond like assets will be the ones to suffer through this. I know a RE firm that bought a bunch of starbucks NNN leases for like a 3.8 cap. The rental escalations are like 5% every 5 years or something. If rates rise like 200-300 bps over the next few years, investments like this will take a hit, not noticeable upfront, but when they go to sell or exit, they're not going to get as much.


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  • Director in RE - Comm
Nov 24, 2021 - 1:04pm

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