Did you ever in your wildest dreams believe you’d see a time when people would be willingly investing in and putting their money into places where the yields on their money would be negative? We all know there’s risk associated with investing, where you can invest in a stock, in a bond, or in commercial real estate, and lose money on that investment. But willingly holding money in an account, or in an investment, knowing that the return it’s giving you is negative, and keeping your money within that investment…is very interesting. But that’s what we’re seeing people do in some banks around the world, and when investing in both corporate and government bonds, too.
Low interest rates can be great for stimulating investment. They can be great for driving up real estate values, too. When people can borrow at lower interest rates this can increase the cash-on-cash return on commercial real estate investments, making them even more attractive, bringing in more interested buyers, and then driving up property prices. Lower interest rates can stimulate more growth within business, too. When businesses can borrow at a lower cost of capital, now expansion can take place more easily, and it can yield more profits, too.
But with commercial real estate, it would be extremely unlikely that we would ever begin seeing negative interest rates charged on loans. One can only imagine the major impact this would have on the commercial real estate market, as lenders would now be paying you interest instead of you paying it to the lenders. However, when it comes to negative interest rates today, in some situations people are actually paying governments and corporations for the right to invest in their bonds, and people are paying their banks for the right to deposit their money in the banks, too, instead of receiving interest from the banks as we’ve normally become accustomed to over the years.
So in these situations, the interest paid is then flowing into the banks, the governments, and into corporations from the people, instead of vice-versa. But don’t ever expect this situation to then reverse itself with commercial real estate loans, where borrowers would then be receiving interest from the lenders on their loans, as this would definitely hammer into the financial industry’s profits.
In addition, there has been talk for some time now about the dangers that are lurking within the bond markets. These low, artificially induced interest rates, including negative interest rates, don’t seem to be correlating with the real risk to investors when investing in these bonds today. Along with this, the huge amounts of quantitative easing that have been going on have definitely been contributing to people’s concerns, too. Because of these concerns, there has been talk about a coming potential crisis within the bond market, but this discussion has also been going on for years now.
However, if this crisis does come, and people begin exiting the bond market in droves, recognizing that their bond investments are no longer secure, look for this to have a significant impact on the upward movement in the interest rates charged on commercial real estate loans, because of the new perception of the greater anticipated risk that will now be involved.