Rising interest rates threaten fragile recovery in global property markets

Deals initiated just a few months ago are being reconsidered, buyers are seeking price reductions, and a number of investment decisions are being postponed or abandoned altogether.

A resurgence in inflationary pressures amid the conflict in the Middle East, combined with higher borrowing costs, is undermining expectations of stronger investment activity in 2026. Market participants believe that the new financing environment is making it increasingly difficult to sustain the valuations agreed upon in previous transactions.

Ronald Dickerman, president of investment firm Madison International Realty, told the Financial Times that rising interest rates are inevitably putting downward pressure on property values. As he explained, when yields rise by 85 basis points within just a few months, buyers have good reason to reconsider the prices they had previously agreed to pay.

Rising Bond Yields and Higher Financing Costs

The property market is particularly sensitive to changes in long-term interest rates, as a substantial proportion of real estate investments and developments are financed through debt. Higher borrowing costs weigh on investment returns and put downward pressure on valuations, widening the gap between sellers’ asking prices and the amounts buyers are willing to offer.

Government bond yields have risen significantly since the outbreak of the war in Iran, according to the Financial Times. The yield on the US 10-year Treasury surpassed 5%, up from approximately 4% at the end of February, reaching its highest level since 2002. In the UK, the 10-year government bond yield climbed to as high as 5.53%, its highest level since 2007.

These developments are directly affecting investment decisions, forcing investors to reassess their cost of capital, expected rental yields and the risks associated with individual transactions.

Price Discounts and Renegotiations

The pressure is already being felt in negotiations. Investors are seeking single-digit percentage reductions in agreed purchase prices, including in transactions that were close to completion.

One notable example involves a $100 million industrial property deal in which the buyer is seeking a 5% discount, despite the agreement having been reached approximately three months earlier. Similarly, bids submitted in the second round of a recent UK warehouse sale were lower than those received in the first round.

David Turner, co-founder of advisory firm DTRE, noted that buyers who agreed to acquire properties during the summer and require debt financing to complete their transactions are now attempting to renegotiate prices. This is creating difficult decisions for sellers, who must choose between accepting a lower price and postponing the sale.

The slowdown is also reflected in a warning from Workspace Chief Executive Charlie Green, who said that property disposals planned by the company could take longer to complete because of higher interest rates and offers that he considers to be below the value of the assets.

Property Owners Adopt a Wait-and-See Approach

Sentiment across the global real estate market is described as particularly negative, with industry participants expressing concerns about cancelled deals and a further decline in transaction volumes.

The current environment is drawing comparisons with 2022, when a sharp rise in interest rates, following the outbreak of the war in Ukraine and the market turmoil triggered by the mini-budget of then UK Prime Minister Liz Truss, led to a significant correction in property prices.

However, industry executives believe the current situation is more challenging, as there are few signs of an imminent easing of broader economic pressures.

At the same time, many property owners are reluctant to sell because they do not want to crystallise losses. This wait-and-see approach is particularly evident in the logistics sector, where a number of investors prefer to retain their assets rather than accept lower valuations.

According to Robert Taylor, head of research at DTRE, transaction volumes are declining because few owners are willing to sell unless they face an immediate need for liquidity.

New Construction Activity Remains Limited

Uncertainty is also affecting new developments, particularly in the office sector. In the UK, office construction starts increased in the third quarter to approximately 1.3 million square feet, representing a 23% year-on-year rise, according to data from CoStar Group.

However, on a rolling 12-month basis, new construction starts remain close to their lowest levels in 15 years. Meanwhile, office building sales fell to a one-year low in the third quarter, while the time required to sell an office property reached its highest level since 2021.

Rental Growth Provides Some Support

Despite these challenges, market conditions are not uniformly negative. Industry executives believe that strong rental growth in the residential sector and in high-quality office properties could partially offset the pressure from higher financing costs.

Furthermore, according to market participants, property repricing has not yet reached the levels seen during the 2022 correction. Nevertheless, prolonged uncertainty is encouraging investors to hold their assets for longer, undertaking renovations, upgrades and improvements to enhance rental returns.

As Chris Pilgrim, head of capital markets at Avison Young, noted, investors are increasingly focusing on managing and upgrading existing properties to improve their performance and deliver greater value to tenants.

The coming months will be critical for the market’s trajectory, as the duration of higher interest rates will largely determine both the direction of property valuations and whether transactions currently under negotiation are completed or postponed.