Ukraine conflict can impact Namibian property market in several ways
By Josef Kefas Sheehama.
There is a likelihood of interest rates continuing to rise as the Bank of Namibia changes its accommodative stance in order to curtail inflation. Conversely, the price of building materials like cement may increase as oil prices go up.
The unfolding conflict in the Ukraine could spell a potential crisis for the Namibian property market. Rising inflation, and therefore an upside interest rate risk, and downside economic growth risk, are the basic macroeconomic risks that appear to emanate from the unrest, the magnitude of which is highly unpredictable.
The impact would be felt in the form of an increase in the cost of building materials, rising crude oil prices and a possible increase in borrowing costs. Higher material costs coupled with higher mortgage rates, will hamper housing affordability. Higher mortgage rates will slow home demand over the course of 2022, and the Russia-Ukraine crisis will add short-term volatility to the bond market. If the Ukraine crisis deepens, then there may be a negative impact on the overall economy including the property market.
There may be an impact on the overall economy in terms of cost of manufacturing and the cost of maintaining supply chains. The price of factor inputs for real estate is likely to go up as a result and real estate developers, who are already operating on thin margins, may not have any option but to push up prices.
Russia’s invasion of Ukraine carries huge risks for a world economy that’s yet to fully recover from the pandemic shock. On the demand side, due to inflationary pressure on the Namibian economy, the Bank of Namibia may have to change its stance, which may lead to more increases in the Repo Rate as well. If this happens, mortgage rates will certainly inch up. The impact will be felt on both demand and supply sides, which will not augur well for property investment.
The global unrest also could give Namibian consumers anxiety and prompt them to cut back on spending which will produce a slowdown in economic activity It’s all bad for the economy and housing. The conflict could put more pressure on rising oil and food prices, which, in turn, could weigh more heavily on consumers’ household budgets.
The negativity around inflation as a result of the conflict led to some sell-off of Namibian Government bonds. While this is not a major sell-off in bonds to date, it does suggest that inflation and interest rate fears would likely exert upward pressure on local property capitalisation rates, and thus be a negative for property valuations.
Buyers are aware that this could put banks under pressure to raise interest rates, which would make mortgage borrowing more expensive. Anyone considering a purchase needs to be comfortable with this risk and not everyone will be. That, of course, will make housing, construction, and consumer goods more expensive.
Furthermore, industrial property may suffer another economic storm of moderate proportions and could quite easily see renewed weakness with rising vacancy rates and further downward pressure on rentals. Industrial property’s link to the global economy is quite strong via warehousing and logistics space used for imports and exports, as well as the local manufacturing sector’s strong trade links to the rest of the world.
The office market is arguably the least directly exposed to any potential global economic impact from the Ukraine war, although it does house certain tenants who trade with the world. But a slowing economy will indirectly impact commercial property leading to declining demand for office space.
The full impact of the the Ukraine war remains highly uncertain, with much depending on how long it continues, its final outcome, and what happens in terms of global sanctions, boycotts and reaction to them. This matters to our local property market because expensive fuel hurts consumer spending and raises the input costs of industries. In turn, construction costs will rise, leading to longer lead times for housing development and extending the supply shortage in residential property.
If anything, the war might keep mortgage rates lower for just a bit longer. Conflicts and market volatility tend to push investors to safer asset classes like treasury bonds and mortgage-backed securities. But the more likely impact is an inflationary impact of some magnitude, which in turn heightens upside risk to both short and long-term interest rates, along with potential downward pressure on global economic growth.
For property, the main potential impact points are via upward pressure on cap rates, upward pressure on vacancy rates, downward pressure on rentals and thus property incomes, as well as possible additional upward pressure on operating costs. It seems the war is keeping the numbers from climbing, but how long that holds remains unknown.