Russia-Ukraine War May Affect Nam Property Market

The unfolding Russia-Ukraine conflict could spell a potential crisis for Namibia's property market, with the price of building materials like cement likely to increase as oil prices go up. Upside inflation, and therefore upside interest rate risk, and downside economic growth risk, are the basic macroeconomic risks that appear to emanate from the war, 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 would hamper housing affordability. Higher mortgage rates would slow home-buying demand over the course of 2022, and the Russia-Ukraine war would add short-term volatility to the bond market. If the crisis deepens, there may be a negative impact on the overall economy in terms of the cost of manufacturing and supply chain, as well as the property market.The price of factor inputs for property is likely to go up as a result and property 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 pressures on the Namibian economy, the BoN may have to change its stance, which could in future lead to an increase in the repo rate as well. If this happens, there is a likelihood of mortgage rates inching up. The impact would be felt on both demand and supply sides, which would not augur well for the property market.The luxury property market may feel the disruption the most, as financial resources homebuyers use to pay for home purchases, such as stocks and cryptocurrency, have been volatile since the conflict began. The global unrest could also prompt Namibians to cut back on spending and economic activities. It's all bad for the economy and housing as the conflict could put more pressure on rising oil and food prices, which, in turn, could weigh more heavily on consumers' household budgets.The conflict also means the price of gas and oil is rising significantly, which is likely to push inflation up way beyond the BoN's prediction. The negativity around inflation prospects as a result of the war in Ukraine has led to some sell-off of Namibian government bonds. While this is not a major sell-off in bonds to date, it does suggest the war's fuelling of heightened 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 would be. That, of course, would make housing, construction, and consumer goods more expensive.Furthermore, industrial property may weather an economic storm of moderate proportions and could quite easily see renewed weakness that could return them to 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 the potential global economic impact from the Ukraine war, although it does house certain tenants who trade with the world. But its potential impact is more indirect via the slowing economy impacting on the number of office worker jobs, in turn exerting pressure on office space demand. Higher interest rates, too, would exert additional pressure on both the landlord and tenant population. The potential war impact on the domestic residential rental market is tough to call, depending on how big the magnitude is. The rental market would strengthen as interest rates rise, with the economy and tenant payment performance both recovering after the hard lockdowns, and a greater group of would-be homebuyers postponing their homebuying to remain in the rental market for longer while rates rise.To this end, the Russia-Ukraine war impact remains highly uncertain, with much depending on how long it continues, its final outcome result, and what happens in terms of global sanctions, boycotts and reaction to them. This matters to the property market because expensive gas hurts consumer spending and raises the input costs of industries. In turn, construction costs would rise, leading to longer lead times for housing development and extending the painful supply shortage in the property market.If anything, the war may keep mortgage rates lower for just a bit longer. Conflicts and market volatility tend to push investors towards safer asset classes like treasury bonds and mortgage-backed securities. But the seemingly 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. * Josef Sheehama is a banking industry professional with 19 years' experience. He writes in his personal capacity.

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