Home
Real Estate Investment in Low Interest Rate Environment

Real Estate Investment in Low Interest Rate Environment

What Do Low Interest Rates Mean for Real Estate Investment and REITs?

According to Real Estate as an Investment Alternative in an Environment with low interest Rates and Inflation, low interest rates make it possible for investors to borrow more money at a lower cost and thereby be able to invest more. This leads to growth in the Real Estate sector because of increased demand over the current supply.

Real Estate has evolved into an essential asset class to investors around the world. According to the report Indian Real Estate Industry, the sector in India is expected to reach a market size of $1 trillion by 2030 from $120 billion in 2017 and contribute 13% to the country’s GDP by 2025.

At the same time, the effects of lowered interest rates on REITs (Real Estate Investment Trust) is not a constantly correlated relationship.

According to a study by REIT, we can see that through most of 2006, the correlation was positive, meaning higher interest rates result in increased value for REITS, however, from 2004 to 2006, this relationship was negatively correlated.

How Do Interest Rates Affect Property Values and REITS Returns?

The Impact of Rising Interest Rates on REITS the effects of rising interest rates do not lead to poor returns. Lower interest rate decreases REIT borrowing costs, which could prove to impact buying opportunity in the long-run. Without a doubt, rising interests pose challenges to REITs.

While there are many other factors at play, interest rate changes do not appear to be the most important dictating factor to performance over the medium and long term. In the end, mortgage rates are directly responsible for an effect on home prices, along with interest rates as they also have a strong effect on them.

Effects of a low interest Rate Environment on These Values and Returns

As discussed below, it’s clear that low interest rates are a trade-off when it comes to Real Estate and REIT investment.

Advantages and Effects

The advantages of a prevailing low interest rate are –

  • Improved buyer interest
  • Increased market opportunity
  • Overall cheaper to invest
  • Fixed-rate mortgages are considerable
  • Reduced REIT borrowing cost

Investors can benefit from a low interest rate environment by being ready to take advantage of buying opportunities. It offers real estate investors an opportunity to stress test for higher interest rates and reconsider making changes in their financing choices.

Disadvantages and Consequences

The low interest Rate Environment Causes, Effects, A Way Out outlines the current declining trends in the interest rates around the world. Falling interest rates may sound appealing because of cheaper money, but this can have several disadvantages as well.

The disadvantages of a prevailing low interest rate are –

  • Chances of excessive demand
  • Higher chances of overleveraging
  • Create conditions for added inflation
  • Lowered interest income for banks
  • Bank deposits (savings) reduce

While cheaper money may sound like a great idea, it adds to further inflation in the economy which can lead to an unprecedented increase in demand for Real Estate and REITs. Over time, this can result in overvaluation and difficulty for new players to invest in the space due to the high-cost barrier to entry.

Historical Trends and Their Impacts on These Values and Returns

Lowered interest rates lead to better buyer interest and more competition in the Real Estate sector. While the mortgage rate and inflation are important influencers of valuation and returns, the interest rate is a key factor that has to be considered simultaneously.

ResearchGate shows that interest rates around the world have been steadily decreasing, resulting in more affordable mortgages due to the reduced cost of cash in the market. However, it’s important to consider the inflation that also takes place during this period and the long term effects it has on the economy.

To better understand how REITs perform in low interest-rate environments, it’s curtail to know how they fare during rising interest rates.

This graph by REIT illustrates how rises in interest rates are caused by positive underlying economic growth and REITS have been seen to perform well during these times.

Forecast for the Future Interest Rate Environment

In certain situations like economic downturn and the likes of the current COVID-19 pandemic, investors continue to see why a solid investment in a real asset that can generate income is one of the best investments out there.

As compared to stocks, real estate and REITs offer investors relatively

The Indian Real Estate market is set to continue growing in the face of adversity as the demand for real estate shows no sign of slowing down.

Regions to Benefit the Most

Discuss the regions that stand to benefit the most. (100 words)

The regions that benefit the most are

  • Switzerland
  • Denmark
  • Japan

The above regions currently exist in a negative interest rate environment, meaning that investors are greatly incentivized to purchase Real Estate and REITs at barely any cost. While this does lead to added demand and inflation, these regions have greatly benefitted from having low interest rates for extended periods with market growth and a positive rate of Return On Investment (ROI).

Most Vulnerable Regions

According to the Research Department at the International Monetary Fund, the biggest challenge that developing countries face is the scarcity of capital for the development required to achieve and a high-rate of growth of national income.

The regions that struggle in times of low interest rates are developing countries. The reason for this is that lower interest rates contribute to higher debt and more easily available credit. In developing countries, due to increased economic uncertainty, this can lead to many great issues. Complications like poverty, cost of living, and similar metrics can mean that lowered interest rates can negatively affect regions such as –

  • Bangladesh
  • Nigeria
  • Ghana
  • Nepal

In countries where inflation has already negatively impacted the country’s economy, lowered interest rates can cause more harm than good, depending on how judiciously the investors choose to utilize the resources.

Conclusion

Real Estate and REITs are a great investment for those looking to move into a relatively more stable and long term addition to their portfolios. In low interest rate environments, banks provide mortgages at reduced rates meaning it’s comparatively inexpensive to invest.

Lowered interest rates also mean that it’s less expensive to invest in a REIT as opposed to times when the interest rate is higher.

As demonstrated above, rising interest rates have not shown to cause a significant reduction in REIT performance. However, rising interest rates are a cause mortgage demand to reduce, meaning it’s more expensive to invest in Real Estate and REITs.