Continuous interest rate increases put property investors in a difficult position
In general, we are seeing a shift right now from a seller’s market to a buyer’s market. Prices for homes that are ready to occupy – both newbuilds and properties that have undergone energy refurbishment – are currently being propped up by the relatively limited supply and by the greater demand from higher income brackets. Tougher price negotiations are taking place for less energy-efficient homes.
Falling interest rates over the past ten years kept the affordability of property more or less under control. Since the first quarter of 2022, however, interest rates have risen sharply and affordability has become a hot topic once again. ‘Although we’ve seen huge increases in interest rates, the story isn’t completely black and white,’ says Tim. ‘There are various measures that private individuals can take to cushion the effect of high interest rates when purchasing a home for their own use. For example, they can borrow over a longer term or simply opt to allocate a larger part of their net income to their dream home. However, this option isn’t open to everyone. Affordability is a real problem for lower and middle income brackets and for single-income households. They are often forced to stay on the rental market for longer, and this is pushing up demand for quality rental properties.
However, a different approach to affordability is taken by investors, who control some 23% of the residential property market. Investors want to safeguard their returns – that is, the annual gross/net rental income relative to the total purchase price, including registration fees and notary charges. This rental return has been under pressure for years due to house prices rising faster than inflation. If we now also take a look at the financing of these properties, we have to compare the interest and capital components with the achieved rental return, as the loan is repaid with income from the rental. A rising interest rate puts pressure on affordability for investors, as more interest and less capital is repaid from the income. If we again deduct the annual costs – namely property tax, maintenance, insurance, management and potential vacancy – this rental return comes under even more pressure.
On top of that, the discrepancy in registration fees in Flanders (3% for the sole family home and 12%) means that investors have a higher acquisition cost than their direct competitors: those buying a home to occupy it themselves.
A further point is that the housing stock is ageing and in need of energy refurbishment. However, investors have to compensate for their investment with a higher rent, and such investments can often lead to a long payback period.
Clearly, the market today is far from straightforward for private investors. Shackled by their need for an acceptable return, higher purchase costs and the payback period for energy efficiency renovations, investors today have difficulty in outbidding buyers purchasing for their own occupation, who are still slightly more numerous on the market for the time being. In addition, there are now also more fixed-income investment alternatives to property. Investors therefore have more choice, although property can still be regarded as an inflation-proof investment compared to other products.
Demand for quality buy-to-let properties is high and investors have a crucial role to play in this, but market conditions are not yet in their favour. ‘This is not to say that there are no opportunities for investors,’ Tim concludes. ‘The only general advice I can give is: look at each project individually and thoroughly. The interest rate isn’t the only relevant factor. High demand on the rental market could lead to rent increases outstripping inflation, which would then mean higher returns. It’s important to identify all the pros and cons before making a carefully considered decision.’
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