‘Real estate always belongs in investors’ assets’

Private bankers may not be directly involved in managing their clients’ real estate portfolios, but they are well placed to observe their clients’ behavior and answer their questions about their entire assets.

Interest rates have risen rapidly and real estate prices do not yet appear to have adapted to this new reality, while the costs for homeowners who opt for rental are also increasing. Do asset managers see a decline in interest in real estate among their affluent clients?

‘At Delen Private Bank we notice that interest in real estate investments is declining. Due to the increased interest rates, its profitability is under pressure. Many customers ask us questions about the sale of real estate. These questions concern the higher costs and stricter sustainability requirements. But the fear of an adjusted tax system also plays a role,” says Bart Menten, board member at Delen Private Bank. Nevertheless, he emphasizes that ‘diversity is always wise and that is why many customers choose real estate’.

As soon as the opportunity presents itself, politicians put a tax on real rental income on the table. The measure was also part of the tax reform that Minister of Finance Vincent Van Peteghem (CD&V) had developed. That has since been canceled, but real estate investors are aware that the government could dip into their pockets to increase tax revenues.

The interest rate increase has not yet had a significant effect on the valuation of real estate. It remains relatively high. According to the notary barometer, the price of houses fell by 0.3 percent in nominal terms in the first half of 2023, while it had risen every time since 2012. It remains a relatively limited decline compared to the slowdown in market activity.

The interest rates that stagnated at the abnormally low level of 1 percent in mid-2022 are today around 4 percent. But that does not seem to influence the dynamics of the market in a uniform way.

‘The buyers are waiting longer and renegotiating the price, while a bidding was still going on during the pandemic. We must make a distinction between buyers who finance the purchase with their own resources and buyers who have to rely on a bank loan. The increase in interest costs directly reduces the purchasing power of the latter group,” says Degroof Petercam. But the bank continues: ‘The supply on the real estate market remains stable, but sales take more time. It will take a few more quarters before the market will find equilibrium again. Buyers are waiting for discounts and sellers are not yet prepared to accept this new market situation.’

Marc Eeckhout, strategist at Puilaetco: ‘Physical real estate belongs in a portfolio, provided the location and energy efficiency are good. We always tell our customers that there are never any objections to investing in a new and well-located property. Indexation means that rents continue to rise. And the demand for rental properties remains high because it has become impossible for young people, partly due to the rise in interest rates, to buy a home without help from their parents.’

According to Degroof Petercam, the clientele also seems to focus on safe investments. In real estate this means new construction. “There is always more demand for new properties because they are more environmentally friendly, more energy efficient and offer greater comfort,” the bank explains.

According to Eeckhout, the higher interest rates – which historically remain relatively low – must be put into perspective from the investor’s point of view. ‘An investor who invests today knows the cost of his loan in the coming years. And the part of his income that goes to that loan decreases over the years due to wage indexation.’ Today the net return on real estate is 2 to 2.5 percent. That is still interesting compared to the return on a savings account. “Especially because the investor can still hope to realize added value on a very high-quality property,” says the strategist.

The experts at Degroof Petercam argue that we must take a new market reality into account. ‘There are real alternatives’ (tara: ‘there are reasonable alternatives’). Fixed-income investments (bonds) remain an interesting alternative at current interest rates to include more defensive securities in an investment portfolio. ‘Even though physical assets remain an interesting diversification in the context of global asset management. At least as long as it concerns good assets at a good price.’

In that context, do investors have an interest in investing in a recovery of real estate paper rather than in maintaining the return on physical real estate in the long term?

Shares of regulated real estate companies (RRECs) have been experiencing difficult times since 2022. ‘It all started with Covid and the pressure of e-commerce on traditional retail. Subsequently, there was more pressure on offices due to the increase in working from home. In recent quarters, increased interest rates also hurt (logistics) industrial players and real estate companies in the health and residential sectors,” say the experts at Degroof Petercam. Today, the prices of shares of listed real estate companies already take into account a lot of bad news. As a result, they are trading at a significant discount compared to the last valuation of their net asset value.

But although the European Central Bank has signaled that its rate hike cycle is due for a long pause, sentiment is becoming more positive. “We have changed our advice on GVVs from ‘under consideration’ to ‘neutral’,” says Eeckhout. He thinks that GVVs will be able to count on renewed interest from investors. Degroof Petercam has already established this: ‘We see that investors are once again becoming interested in those shares. For a selective investor, there are interesting values ​​in this segment, with high-quality assets and sustainable interest from tenants. But caution is required when it comes to over-indebted companies that are forced to sell assets to make their balance sheets healthy,” concludes Degroof Petercam.