The interest rate cut by the European Central Bank has been welcomed by property professionals.
The European Central Bank cut rates by 25 basis points for three key interest rates on Thursday. The interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will be decreased to 4.25%, 4.50% and 3.75% respectively. It argued that based on the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy, “it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady”.
Property professionals expect that the rate cut will give a much-needed boost to Europe’s economies and make it easier to refinance loans against properties that were bought before a series of interest rate hikes starting in early 2022. More importantly, they hope that the cut paves the way for more cuts later in the year. However, some warn that the impact of today's cut will be limited while others worry that the ECB may have moved too early.
“Ultimately, this is a story of bears and bulls and a rate cut will certainly see a higher cohort of bulls returning to the market,” said Mahdi Mokrane, head of global investment strategy, research & investment solutions at Patrizia in a note ahead of the decision. “Encouragingly, this year we have already started seeing the early signs of stabilisation in the real assets market with a pick-up in capital raising in the first quarter, so more bulls returning to the market will only help keep this momentum moving in a positive direction.”
In a note ahead of the cut, Avison Young Germany agreed, saying that 2024 could be a turning point in the property markets.
“The preparedness to invest should return with falling interest rates,” said Nicolai Baumann, its country manager.
The financing situation of many German companies is under pressure, according to the property consultant. Lower interest rates would help relax the situation a little, particularly at property companies and developers, according to the property consultant.
Moody’s senior economist, Ermengarde Jabir, downplayed the impact of today’s rate cuts, calling them “rather nominal”.
“The policy reductions would likely have to be sharper for any real relief to be felt as the market has likely already priced in previous expectations of a small rate cut this year,” she said in a response to the interest rate cuts.
Avison Young expects interest rates to come down to 3.5% to 3.75% by the end of this year. Moody's Jabir does not rule this out, but think rates will stay at the current level if the data does not change. She pointed out that the ECB cut rates to boost GDP growth, to avoid a recession, while keeping an eye on inflation.
"The ECB dipped its toe in the water to see how markets and the economy would react," said Jabir.
Patrizia’s Mokrane believes that future cuts will happen faster than many might expect as net credit growth in the region has turned “anaemic at both household and corporate levels, meaning that the economy cannot afford the current interest rate levels”.
David Rea, JLL’s director of macro research and chief economist EMEA, said the rate cut “opens the door for both further cuts in the future and to a future compression in real estate yields, an attractive prospect for investors”.
“Lower future borrowing costs and the possibility of capital value appreciation will likely begin to improve both underwriting ability and willingness, while increasing transactional liquidity. But this will happen slowly, and at different speeds,” said Rea. “Market adjustment was not uniform as yields rose, and it will not be as they compress. We anticipate that more liquid gateway markets will adjust more quickly.”
Across Europe, the move was also welcomed. Borja Garcia-Egotxeaga Vergara, chief executive of Neinor Homes, a Spanish residential property developer, said the cut “will have positive implications for Spain’s residential market and its wider economy, which is expected to continue to outperform its European peers with GDP growth of 2.1% expected in 2024".
He said that Neinor has “registered our strongest start to a calendar year since 2021. This is in part due to buyers anticipating reductions in borrowing costs.”
As usual, the ECB did not give any indication about future rate cuts. Its governing council said it is determined to ensure that inflation returns to 2%. Inflation had been creeping up before the interest rate decision. The bank said it now expects headline inflation to average 2.5% this year and 2.2% in 2025 and 1.9% in 2026. Some worry that it may have moved too early, sparking more inflation.
While welcoming the move, Ben Nichols, interim managing director of RAW Capital Partners, said: “[...] the risk remains that the ECB is cutting rates too early, and it will be intriguing to see if the US Federal Reserve and Bank of England follow suit in the coming months”.
“The outlook for energy prices is unreliable and geopolitical conflict in Europe and the Middle East could create major challenges further down the line,” said Nichols. “What’s more, the eurozone’s labour market remains surprisingly strong. Therefore, a rekindling of inflationary pressures remains a significant risk factor if the bank cuts rates too quickly.”
Moody’s Jabir pointed out that the set of factors the Federal Reserve has to consider when deciding on monetary policy action “differs significantly” from the ECB and Bank of Canada.
Unlike in the United States, "Canada and the eurozone nations are facing lower GDP growth, higher unemployment rates, and lower (in some countries in the EU, much lower) inflation,” she said.
(Updated with more comments from Moody's Ermengarde Jabir in the 10th paragraph)