Interest rates and real estate investment: impact and scenario

Interest rates have been rising in recent years, particularly since July 2022, as Central Banks aim to address rising inflation. The recent drop in inflation has allowed the ECB to ease its grip and cut benchmark policy rates by 0.25 percent, starting on June 12. This long-awaited decision has certainly given the economy a breath of fresh air, although expectations of a return to extremely low interest rates, such as those we had become accustomed to until 2021, are still unlikely. It is advisable to adapt to a "new normal" and carefully evaluate market opportunities.

In the real estate investment sector, the current period may offer attractive deals for potential buyers. The low interest rate environment and favorable real estate market dynamics make this type of investment particularly attractive.

Benefits of lower interest rates on real estate

After a slowdown in buying and selling in 2023, partly due to the expectation of improved mortgage conditions, 2024 started with a slight improvement, especially in large cities. However, in many areas of Europe, prices have remained stable or even declined. Lower interest rates may, therefore, incentivize investment in real estate as a form of portfolio diversification.

What, then, are the potential benefits of the ECB's recent decision on investments and, in particular, investments in real estate? Here are five main ones:

1. Accessibility to credit. Lower interest rates result in lower mortgage costs, making it more affordable to finance the purchase of real estate properties. This can stimulate demand for real estate.
2. Properties prices. With more people able to obtain lower-cost mortgages, competition to purchase real estate, including luxury properties, can drive up prices, benefiting both owners and investors.
3. Improved liquidity. If buyers have a better chance of obtaining financing, market liquidity also improves. Many buyers will use financing to avoid disinvesting capital with higher returns, facilitating real estate transactions and making the market more dynamic.
4. Attraction of international buyers. A Europe with lower rates becomes more attractive to international buyers. Foreign buyers, attracted by beautiful locations and more favorable economic conditions, may see real estate, whether luxury private residences or hospitality facilities, as a safe investment. The relationship between local and foreign currencies can also positively affect investment decisions.
5. Boosted local economy. A growing real estate market can have positive effects on the local economy in general: for example, building a resort or renovating luxury villas are activities that contribute to job creation and increased demand for local services.

Investment trends and growth in real estate

Despite the volatility and economic uncertainty, real estate funds demonstrate an ability to maintain and increase their value while generating stable returns. This resilience makes them particularly attractive to investors seeking long-term security and growth. The increase in the global assets of real estate funds and REITs highlights the continued confidence of investors in this sector, which is considered a safe haven against market fluctuations. According to the 44th 2024 Report on "Real Estate Funds in Italy and Abroad" [1], the total assets of funds-both listed and unlisted as well as REITs-reached 4,650 billion euros at the end of 2023, marking a 4.5 percent increase over 2022, with REITs accounting for about 76 percent of this total.

Notably, 2024 consolidates as particularly favorable for value-added investments, with investors ready to take on more risk in exchange for higher returns. There is increasing interest in modern offices with advanced technology and sustainable design that meet contemporary work needs, and in high-quality residences and co-housing projects, which emerge as one of the most dynamic and promising segments for international investors.

Across all real estate sectors, there is a growing demand for sustainable properties capable of supporting ESG policies and addressing environmental preservation issues. The increasing focus on sustainability is gaining traction among investors, who see greener and more sustainable real estate as a strategy for gaining long-term competitive advantages.

These investments, which involve the redevelopment and upgrading of properties and residences, promise high returns through significant property improvements.

Anticipating and confirming these trends, at YELDO we offer our Real Estate Private Debt Fund, which aims to provide attractive returns with calculated risk, while offering great diversification and semi-annual repayments. For those who prefer to choose their projects one by one, we have the deal-by-deal formula, allowing you to build up a custom portfolio.

Why invest in real estate, taking advantage of lowering rates

Investing in real estate through private debt solutions can offer several relevant advantages that meet the needs of advanced investors seeking stable and diversified returns.

Indeed, this type of investment tends to offer higher returns than traditional bond instruments but without excessive risk; for example, at YELDO we base our investment strategy on senior and mezzanine positions with real estate guarantees.

Adding real estate private debt to your portfolio allows you to diversify your sources of return and risk, as real estate is a tangible asset that behaves differently from stocks and bonds, offering protection against financial market volatility. In addition, real estate investments maintain or can even increase their value over time, providing natural protection against inflation through rising rents and property values.

Another advantage is having access to high-quality projects that are not always available through traditional investment channels, such as the development of new properties, the redevelopment of existing properties, or the acquisition of high-value commercial properties. Finally, in many countries investment in real estate offers significant tax advantages, such as deductions for interest on debt and depreciation, further improving net returns.