This rise has been boosted by two factors: the inflationary environment, which has prompted the ECB to raise its key interest rates, and the monthly update of the usury rate by the Banque de France. The impact of these changes on home ownership plans for individuals is regularly talked about, but property professionals are also very much feeling the impact. In the new-build sector in particular, demand is in freefall, with sales down by more than 30 % in the first half of 2023*. More broadly, we are facing a very worrying social and financial crisis. Nicolas Biais, Associate Director of Primpromo, examines the risks facing the property sector and looks at the ways in which industry professionals can make improvements.

Frédérique Boyer, Associate Director, Xloan

A restrictive rate hike

The key interest rate is the rate at which banks borrow from a central bank. On 14 September, the ECB announced that it was raising its key interest rates for the tenth consecutive time. This increase, driven by inflation, goes hand in hand with the rise in borrowing rates implemented by commercial banks. Since 2022, a sharp hike in lending rates has effectively penalised the property market as a whole. “For a 25-year loan, the rate is now 4.35 %**, whereas a year ago it was possible to borrow at less than 2 %.
Some would-be buyers are forced to give up because of a lack of finances”, explains Nicolas Biais. Developers are not immune to these difficulties in accessing credit, and as a result are increasingly vulnerable due to the decline in their cash flow.

“The maximum debt ratio of 35 % of pre-tax net income, set by the Haut Conseil de Stabilité Financière (HCSF – French High Council for Financial Stability), further complicates matters. Buyers are seeing their borrowing capacity shrink or their loan periods lengthen”. Many credit applications are also being refused due to the usury rate, which has been raised every month since 1 February 2023. “It stands at 5.80 % for 20-year mortgages signed in October”. Set by the Banque de France, the usury rate varies according to the ECB’s key interest rates and the average effective rates charged by credit institutions. Its role is to capture the rates applied by the banks, although this clearly slows down the market considerably.

New-build property in crisis

This climate of tension can be seen in the sale before completion market, with a record withdrawal rate of “52 %, compared with 10-15 % over the last two years”, points out Nicolas Biais. As well as withdrawals, developers are having to cope with much longer sale lead times: 18 months on average, instead of the 9 months experienced before the end of 2022. And stock is very expensive. “We entered a property crisis in the fourth quarter of 2022, but this is not just about lending rates. A few years ago, we were borrowing at 13 or 14 %, but housing was cheap. The crisis is taking hold because of the two-fold problem of very high lending rates and very high property prices. What is more, lending rates are rising much faster than property prices are falling.“

For property developers, the rising cost of materials and the costly application of new regulations are adding to financing difficulties. For older homes, France’s “Climate and Resilience” law requires them to be renovated. And for new homes, Environmental Regulation RE2020 applies to building permits submitted since 1 January 2022. “France needs 500,000 homes a year. This figure currently stands at 120,000 and is set to fall further”. Between January and May 2023, building permits in the residential sector fell by 37.4 % and housing starts fell by 21.5 %***. “The lack of construction is creating a housing shortage. Local authority budgets are also being affected, as the fall in transactions is accompanied by a fall in transfer taxes. The end of the Pinel scheme on 31 December 2024 is another factor that will exacerbate the crisis, as some investors will abandon their projects. The construction industry will be forced to reduce its wage bill until the situation improves. The problem is therefore global, and if no government measures are adopted to extend the Pinel scheme or support investors, we are heading for a property and social crisis similar to that of the 1990s. France is not the only country concerned. Rising interest rates are weakening the United States, the United Kingdom and Germany. Country Garden, one of China’s largest property groups, is also in serious difficulty.”

The need to adapt

To compensate for financial losses, new build property developers are being forced to review their strategy. Cutting back on margins is risky and difficult to apply to all projects. “What is more, developers have fewer deals that would enable them to offset these projects at reduced margins or at a loss. Some are choosing to invest in other activities alongside their business, such as energy or timber construction. The developers who are doing best are involved in the redevelopment, development and rehabilitation of well-located brownfield sites – but these require a financial investment that makes them inaccessible to everyone”. Converting office buildings into housing is another interesting prospect. “Globally, we are seeing the construction of an increasing number of mixed-use buildings, which are not exclusively dedicated to residential or business use, but can be adapted according to need.
With the advent of the flex office and remote working, fewer square metres of office space are required.” This flexibility is likely to increase the resilience of developers in these trying times. It is also essential to maintain a relationship of trust with banking institutions, in order to identify the most appropriate financing options.

Xloan and Primpromo are Open Source solutions

About Primpromo

Primpromo is the digital solution dedicated to property development, developed in partnership with the main stakeholders in the sector for over 20 years. It allows developers to industrialise their operations by covering the entire life cycle of a development, from prospecting to delivery. Primpromo enables property developers to increase productivity, optimise the management of their developments and secure their financial flows. A single, future-proof solution tailored to the needs of the entire organisation (covers the needs of the entire organisation: Development, Programme, Sales, Technical, Financial and Accounting Departments).

What is Xloan?

Xloan is the expert digital platform for credit and leasing management. Recognised in its market, Xloan is used by many generalist and specialist financial institutions. The solution covers all business processes, from acquisition and commitment management to financing life cycle management, collections and accounting.

*Federation of Property Developers, “The new housing market: a crisis looming”, 14 September 2023.

***French Building Federation, “Situation at the end of June 2023”, 4 July 2023