Economy

The importance of Real Estate

What is Real Estate?

Real Estate in the EconomyProperty-related activities are highly diverse and involve besides property management also planning, financing and construction activities, valuation, facilities management as well as consultation or brokerage services. The real estate sector has a higher economic importance than other sectors such as the automotive industry or the healthcare sector. It makes a major contribution to GDP in the European Union and provides prosperity and jobs. According to Eurostat data the real estate sector contributed approximately 10% to the European economy in 2014. Real estate represents the majority of the existing real capital and is particularly relevant also because of its additional function as provision for old age and protection against inflation.

Role of Sector in Economy

Real estate is one of the most important sectors in the economy. The affordability of real estate and rental prices and changes in those prices have a direct impact on the wealth of property owners and tenants and their consumer spending. Therefore, the development of rents and property prices is not only followed closely by private households that wish to change their housing situation or plan to invest, but also increasingly by the central banks. Housing prices are a critical factor in consumer spending and play an important role for price developments. However, in recent years, the interest of central banks in real estate markets has gone beyond this direct effect on inflation rates. Nearly all major institutions, such as the European Central Bank, the OECD, the International Monetary Fund and the European Commission, are focused on the dynamics of real estate prices and their influential factors. Researchers and politicians increasingly consider that real estate markets play a decisive role in the transmission of monetary policy impulses. Key interest rate changes can have an intermediate effect on the economy via real estate prices and might influence or initiate upswings and downturns.

Impact on Economic Stability

There is an important relationship between real estate and capital flows to real estate, on the one hand, and economic stability, on the other. Besides lending substantial sums to real estate businesses, Europe’s banks rely on real estate collateral to reduce the risk of much of their household and commercial lending. Real estate serves as a guarantee for financing and as an important element of economic stability.

Importance for Institutional Investors

Real estate investments play a major role for private and institutional investors. But just as the property industry has influence on the financial market it also depends on it as highly capital-intensive sector. Access to loan capital is decisive in order to guarantee investments in real estate. The banking sector still is the most important credit provider for the property industry. However, due to the financial crisis and growing regulatory requirements in the banking sector, alternative financing models including real estate debt products have become more and more important for project developers and investors as well as a source of secure returns.

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