Negative interest rates are a systemic risk to the real estate industry, CREFC Europe has warned.
The trade body claims that with the European Central Bank and other central banks reducing rates to less than zero in some cases, the real estate industry could be subject to much greater costs and a risk of bubbles in some markets.
The root of the problem, according to CREFC, comes from the swap hedging instruments that ordinarily protect borrowers and lenders from increases and falls in underlying interest rates.
A simple swap agreement exchanges a floating rate of interest for one that is fixed or vice versa.
However, the agreements rarely incorporate any form of protection for interest rates to pass through zero and into negative territory.
As a result, an increasing number of deals are being hedged by swaps incorporating a floor, which protects both parties, but mostly the lender, from having to pay the borrowers for their loans.
These derivatives are, says CREFC, considerably more difficult to price and more expensive for borrowers.
The body also said that negative interest rates could mean:
- added complexity in borrowing documentation;
- greatly increased time needed to complete loan agreements;
- higher costs to loan agreements;
- risk of residential asset bubbles in some countries; and
- retrospective addition of costs as lenders protect themselves.
