The ECB Governing Council recently decided to raise all three key interest rates of the European Central Bank by 25 basis points each. This decision was analysed by various market participants in the real estate sector, with a particular focus on the implications for investment and financing.
Professor Dr. Felix Schindler, Head of Research & Strategy at HIH Invest, noted that the ECB was following market expectations with this interest rate hike. The annual inflation rate in the Eurozone had reached over three per cent, which is above the ECB's inflation target. Significantly increased energy prices were again cited as key drivers. Furthermore, the rise in core inflation since the outbreak of the Iran conflict indicates that the price increase extends beyond the energy component and affects a growing number of goods and services. A continuation of this trend is likely given ongoing military escalation in the Middle East and the blockade of the Strait of Hormuz. Heatwaves and droughts in recent months are also likely to drive up food prices.
The economic situation, particularly in Germany, is proving more stable than expected in spring despite geopolitical and economic uncertainties, which has reduced reservations about a rate hike. Schindler emphasised that the key interest rate increase had been anticipated by the capital markets; capital market rates had already risen significantly in previous weeks due to increasing inflation rates, national debts and expansionary fiscal policy. He assumed that the rate step would not have significant effects on the real estate markets, as these are more subject to the development of long-term capital market rates. The real estate industry will have to prepare for a longer period of higher interest rates and adapt its business models in many cases.
Professor Dr. Steffen Sebastian from the Chair of Real Estate Finance at the IREBS Institute for Real Estate Management at the University of Regensburg confirmed that the interest rate hike of 0.25 percentage points was almost certain, as inflation in the Eurozone rose to 3.3 per cent in August, thus significantly exceeding the ECB's target. He highlighted that the current inflation surge is largely characterised by energy prices as a supply shock, and the ECB cannot take direct measures against high energy prices itself. For further rapid key rate increases, a spillover of the energy price shock to wages and other prices would have to manifest, for which there is currently no clear evidence.
Francesco Fedele, CEO of BF.direkt AG, underscored that for real estate financing, long-term interest rates determined by the capital market are more crucial than key interest rates. The ten-year swap rate has shown a clear upward trend since 2024, with a temporary easing after the ceasefire in Iran no longer being observed. Should the ECB leave key interest rates unchanged at subsequent rate-setting meetings this year, long-term rates could stabilise. However, a consolidation of the inflation surge would lead to further rising financing costs. He advised borrowers to prepare refinancing early and not to hope for a short-term decline in interest rates, especially since the current interest rate level is still to be considered low in the long-term average.
Torsten Hollstein, Managing Director of CR Investment Management, assessed the interest rate hike as an exacerbation of the already tense situation in the real estate sector. Higher financing costs are met with significantly reduced property values, leading to a decrease in possible loan-to-value ratios and an increased need for equity. This makes negotiations between owners and capital providers more difficult, especially for upcoming refinancings. Hollstein emphasised the necessity of adjusting to the fact that the higher interest rate level is not a temporary phenomenon. Those who rely on a quick decline in interest rates run a considerable risk, as today's interest rate level is by no means historically high. The long period of extremely low and sometimes negative interest rates was rather the exception, and this reality must now be reflected in valuations, financing structures and business plans.
Maximilian Radert, Head of Product Development & Research at KINGSTONE Investment Management, explained that the 25 basis point increase in the deposit rate to 2.5 per cent was largely priced in, but the decision itself was by no means a foregone conclusion. What matters now is less the step itself, but rather the classification of the ECB's future monetary policy course. The 3.3 per cent inflation in the Eurozone, particularly due to higher energy prices, which kept price pressure significantly above the ECB's 2 per cent target, argues for further tightening. At the same time, the situation is ambiguous, as core and services inflation remain moderate, second-round effects are limited, and the labour market shows a mixed picture. Declining wage growth, weaker employment growth and more moderate unit labour costs argue against an automatic entry into a new cycle of interest rate hikes. Radert therefore suspects that the September step marks the provisional end of the current tightening.
