Initial situation on the markets
Threats and military rallies put stock markets on alert even before Russia invaded. If anything has a negative impact on the overall economy, it’s uncertainty. Stability and the ability to plan are helpful at all levels – for the small entrepreneur around the corner, as well as for corporations, for investors and also for the financial policy of a state. It is precisely this stability that was shaken by the attack.
From today’s perspective, it is not possible to predict how world trade will still function in a few months’ time. From an economic perspective, the mutual Sanctions from all states for this very insecurity. What does that mean exactly?
What are the effects of government sanctions?
“Sanctions” are measures intended to damage the sanctioned country economically. For example, the European countries have blocked the airspace for Russian aircraft. The result is that massive detours have to be flown or some routes almost are impossible to cope with. Due to the limitation of the SWIFT system, it is for Russia has become more difficult to process cash flows. All of these measures inflict economic damage on Russia.
The aim of these sanctions is, on the one hand, to build up financial pressure. On the other hand, these measures also ensure strong inflation. Goods are difficult to import, creating shortages and increasing prices. First of all, this affects the general public. But the hope is that this will then put pressure on politicians to act in such a way that the sanctions are relaxed again.
Also because of the previous sanctions, Russia has decided to close the stock exchange (as of March 2nd) in Moscow for the time being.
Economic leverage of Russia
Not only European countries, Canada and the USA can impose sanctions against Russia, countermeasures are taken by Russia as a matter of course. Gas is Russia’s greatest leverage. On the one hand, Russia needs the income from gas supplies to the whole of Europe, on the other hand, many countries are dependent on gas supplies.
Not only so that the population can heat with it, but also because numerous industrial companies use large quantities of gas to manufacture their products require. Russia thus has equally strong economic trump cards . On the other hand, these are probably far from exhausted.
Effects on the German economy
In Germany, sanctions will also have an impact on gas supplies. In addition to Russia’s economic measures, the war is also having an impact. Because the war eliminated the supply industry, which is or was important for many German companies. In the Ukraine, for example, parts were manufactured for BMW that are absolutely necessary for the production of the vehicles.
Countless companies have exported to Russia and Ukraine, many of which even have subsidiaries or regional branches there. All of this was also reflected in the deep red DAX in the last few days.
Real estate market in Germany
There will be primarily indirect effects on the real estate market, which will arise as a result of sanctions.
interest and inflation
For example, it is unclear whether and when interest rate hikes, which have already been announced by the central bank, can actually be implemented. If the domestic economy is already under pressure due to sanctions and the collapse of business in Russia and Ukraine, it could be necessary to continue providing companies with cheap loans.
Conversely, inflation must be monitored and stabilized. With regard to the development of interest rates, which is ultimately also very important for financing real estate purchases, we have to wait and see. The most likely variant from today’s perspective is that interest rates can be raised later or less, so that there is still access to cheap capital, which company can secure liquidity in a difficult phase.
Conversion to renewable energy
Germany’s dependence – and that of neighboring countries such as Austria – on Russian gas will now be critically questioned. In order to become independent of supplies from Russia, the energy transition must be pushed even faster. Because the less energy Russia has to import, the less influence the Kremlin can have on Germany. Sustainable energy sources, directly in Germany, are therefore essential in the future.
For the real estate industry, the consequence can be that subsidies for the replacement of gas heating systems are introduced or increased. It is also conceivable that not only Germany, but even the EU, will provide additional funds for the switch to other forms of energy in real estate.
Additional housing needs
It should also not be underestimated that potentially hundreds of thousands of refugees will find a new home in Germany, for whom housing must now be found in the short term. Many refugees will not be able to return to their homes in the medium term if the war continues. It can therefore be assumed that there will be a corresponding additional need for living space, across Germany and Europe, for a large number of people.
How much this higher demand will have a lasting effect on the market and how many people actually want to stay in Germany in the long term cannot be reliably estimated at the moment.
Real estate investments: You should consider this
We have now discussed the macroeconomic effects and how sanctions and refugee movements will affect Germany. But what does that mean in concrete terms for real estate investments?
Hold existing investments
Anyone who already owns real estate in Germany is unlikely to sell it now. Alternative investment opportunities, such as on the stock exchange, are extremely volatile.
In addition, the further development of interest rates and inflation is difficult to predict. At the same time, from an investor’s perspective, inflation can be passed on to tenants by concluding index-linked leases. Real estate inflation protection is only one aspect, however. If there is further inflation, this reduces, in Relation to purchasing power, also the residual value of existing real estate loans.
So there is currently practically nothing to be said for the sale of existing investment properties. Those who do not urgently need the capital will keep their property. Panic selling is generally inappropriate. And especially in the current situation you then have cash that is losing purchasing power due to inflation. At the same time, there are no good opportunities to invest the purchase price achieved elsewhere.
Drafting rental agreements
One consideration that real estate investors can make is the design of the leases. The rent can be adjusted as a graduated rent or it can be increased to match the comparable rent, which can, however, lead to disputes. Alternatively, an index rental agreement can be concluded. The increase then corresponds to the consumer price index, i.e. de facto the inflation rate. However, an additional increase is not possible. But this is how it is possible to protect the rental income against inflation obtain.
In times of potentially high inflation, this provides a solid security in terms of income. In addition, discussions about exactly which rent is now permissible are spared. Many tenants are also happy to know that the rent can rise in line with inflation, but cannot be increased in any other way.
Right time to buy?
If you are now considering buying a property, you have to reckon with the fact that the demand on the market is currently high. Many investors are getting out of other investments, as can be seen from the losses on the stock exchange in the past few days. This capital will probably flow, at least in part, into the real estate market.
There is no such thing as a “right” time to buy real estate – just like there is no other investment. The key question to ask yourself is whether buying a property fits your strategy and will help you achieve your financial goals. The main arguments for this at the moment are that financing is cheap and the alternative investment opportunities are hardly convincing.
The downside of this fact is that there is correspondingly tough competition on the market and it is becoming more difficult to find high-yield properties.
Risk diversification more important than ever
The war clearly shows investors how important it is to spread the risk of investments. We have often pointed out in our blog that it is best to spread your wealth across a portfolio of investment opportunities. Real estate is a particularly important part of this. Especially now that some asset classes are strong come under pressure, this can be offset by other investments.
If you have already broadened your portfolio, you are experiencing this clearly these days. On the other hand, those who currently only rely on one or two asset classes should urgently change that. For example, owning only stocks these days is a painful experience.
Therefore, use a wide variety of investments to spread the risk: real estate, stocks, bonds, crypto, gold – right up to art, practically anything is possible if you recognize the value and the chance of a future increase in value.
Conclusion: Effects of the war on real estate investments
In summary, the reciprocal sanctions affect the entire economy and will affect the markets in the long term. On the one hand because sales markets are collapsing, on the other hand because supply chains come to a standstill and transport becomes more expensive, more difficult or impossible. The effects are already visible on the stock market.
Inflation and interest rates play an important role in real estate investments. It is now no longer possible to predict with certainty whether interest rates can actually be raised, when and to what extent. Interest rates may be left at a lower level in order to strengthen the liquidity of domestic companies. At the same time, this could drive inflation further up, and real estate prices could also continue to rise as a result.
Additional demand in the real estate market will arise as investors take money out of the stock market and seek safe alternatives. At the same time, the need for housing is increasing, as many refugees are expected in Germany.
Anyone who already owns real estate will therefore hold it as long as there is no capital requirement. An increase in value seems likely and inflation protection is provided by index leases. If you want to invest now, you have to search specifically for properties with a good yield , because demand will probably exceed supply even more in the future than before.
Disclaimer: We are aware that there are currently more important issues than real estate investments. At the request of our community (we put it up for vote), we’re still posting updates on this topic. At the same time, we call for solidarity with refugees and all other affected people and, of course, speak out against any acts of war.