In recent years, it has become common for many domestic companies to accelerate their business through debt financing. This is because it was cheap not only with banks, but also by using corporate bonds. In addition to low interest rates, these were also popular because they were easier to issue and had fewer requirements on the issuer than banks. However, the previously very favourable market conditions have now disappeared. Rising interest rates are making financing up to three times more expensive, so some companies will have to find sources of more expensive financing. However, the wave of forced sales is not yet taking place on the domestic commercial real estate market, comments Vítězslav Doležal, Director in the Investment team at real estate consultancy CBRE:
“Financing has become significantly more expensive in a relatively short period of time. It is typically three times more expensive, on average by 400 to 600 basis points. Despite this, we are not seeing above-average levels of ‘forced sales’ in the market, which is due to several factors. First, most investors have maintained a reasonable level of LTV, the ratio between the loan amount and the value of the subject property. This has traditionally been close to 60%, which is also why companies have not yet breached the banks’ conditions, which include, among other things, the DSCR debt service coverage ratio. Secondly, the value of commercial property has so far fallen only slightly. Pricing across segments continues to be held up by a healthy rental market combined with weak construction and proportionate rent increases above inflation. Last year, this was around 9% for rents denominated in euros and 15% in crowns. Thus, most funds have posted decent returns over the past year, which has convinced some shareholders enough not to withdraw funds. Thirdly, funds are legally obliged to hold part of their capital in a liquid component for possible withdrawals, and as there has been no dramatic “hunt” for funds so far, they still have sufficient reserves for withdrawals. Last but not least, they have also improved their communication with shareholders, who then do not act rashly and withdraw funds in an apparent panic.
Compared to a year ago, the scales have turned between supply and demand – few wanted to sell in 2021 for fear of where to reinvest the profits. Now a large number of investors are waiting for bargain buys. Thus, compared to the situation in 2021, we see significantly fewer investors actively buying, which limits the marketability of properties. As investment volumes are well below the long-term average from Q2 2022 onwards, planned sales are being delayed and there are significantly more potential (non-public) commercial properties to buy. However, price expectations on both sides have so far rarely met, so there is little liquidity in the market.”
Source: Commentary by Vítězslav Doležal, Director in the Investment team at CBRE, on rising interest rates on debt financing and the related impact on the commercial real estate market
