Opinion – The Russian-Ukrainian crisis could affect the local real estate market

Interest rates are likely to rise as the Bank of Namibia may change its dovish stance to reduce inflation. The price of building materials like cement can increase as oil prices rise.

The unfolding conflict could mean a potential crisis for the Namibian property market. Upside inflation, and therefore the risk of higher interest rates, and the risk of lower economic growth, are the fundamental macroeconomic risks that seem to emanate from the turmoil, the magnitude of which is highly unpredictable. The impact would be felt in the form of an increase in the cost of construction materials, higher crude oil prices and possible increase in borrowing costs. Higher material costs, coupled with higher mortgage rates, will hamper housing affordability. Rising mortgage rates will dampen demand for home purchases through 2022, and the Russia-Ukraine crisis will add short-term volatility to the bond market. If the Ukrainian crisis worsens, there could be a negative impact on the global economy and the real estate market.

There may be an impact on the overall economy in terms of manufacturing cost and supply chain. The price of the factors of production for real estate is likely to rise accordingly and real estate developers, who already operate on low margins, may have no choice but to drive up prices. Russia’s special military operation in Ukraine carries huge risks for a global economy that has yet to fully recover from the pandemic shock. On the demand side, due to inflationary pressures on the Namibian economy, the Bank of Namibia may have to change its position, which could also lead to an increase in the repo rate in the future. If this happens, mortgage rates are likely to rise. The impact will be felt on both the demand and supply sides, which does not bode well for the real estate market. The luxury real estate market may be the most disrupted, as the financial resources used by homebuyers to pay for home purchases, such as stocks and cryptocurrency, have been volatile since the conflict began. The global unrest could also worry Namibian consumers and prompt them to cut back on their spending and economic activities. Everything is bad for the economy and housing. The conflict could increase pressure on rising oil and food prices, which, in turn, could put a greater strain on household budgets.

The conflict also means that the price of gas and oil rises dramatically, which is expected to push inflation well beyond the Bank of Namibia’s forecast. Negativity surrounding the outlook for inflation following the conflict in Ukraine led to a sell-off in Namibian government bonds. While not a massive bond sell-off so far, it does suggest that the Ukraine crisis, which is fueling heightened inflation and interest rate fears, would likely put pressure on the rise in local real estate capitalization rates, and would therefore be negative for real estate valuations. Buyers are aware that this could put pressure on banks to raise interest rates, which would make mortgage borrowing more expensive. Anyone considering a purchase should be comfortable with this risk and not everyone will be. This, of course, will make housing, construction and consumer goods more expensive.

Additionally, industrial real estate could weather an economic storm of moderate proportions and could quite easily experience renewed weakness that could lead it back to rising vacancy rates and downward pressure on rents. Industrial property’s link to the global economy is quite strong via the warehousing and logistics space used for imports and exports, as well as the local manufacturing sector’s close trade links with the rest of the world. The office market is arguably the least directly exposed to the potential global economic impact of the conflict in Ukraine, although it is home to some tenants who trade with the world. But its potential impact is more indirect, via the slowing economy which affects the number of office worker jobs, in turn putting pressure on the demand for office space. Higher interest rates would also put additional pressure on the homeowner and renter population. The potential impact of the conflict on the domestic residential rental market is difficult to assess, depending on its magnitude. The rental market will strengthen as interest rates rise, the economy and tenant payment performance recovering from the harsh closings, and a larger pool of potential buyers postponing home purchases to stay longer in the rental market as rates rise.

To that end, the impact of the Ukraine crisis remains highly uncertain, much depending on its duration, its ultimate outcome, and what happens in terms of global sanctions, boycotts, and response to them. This is important for the real estate market, as expensive gas hurts consumer spending and increases input costs for industries. In turn, construction costs will increase, which will lengthen housing construction times and prolong the painful shortage of supply in the real estate market.

On the contrary, the war could keep mortgage rates lower for a little longer. Market conflicts and volatility tend to push investors towards safer asset classes like treasury bills and mortgage-backed securities. But the seemingly likely impact is an inflationary impact of some magnitude, which in turn increases the upside risk to short- and long-term interest rates, as well as potential downward pressure on economic growth. world. For real estate, the main potential points of impact are via upward pressure on capitalization rates, upward pressure on vacancy rates, downward pressure on rents and therefore property income, as well as possible additional upward pressure on operating costs. It looks like the war is keeping the numbers from climbing, but how long that holds remains unknown.

2022-04-01 Staff reporter