Live From Santa Marinella

On today’s show we are coming to you live on location in Italy. We are about an hour outside Rome at a seaside town called Santa Marinella. I come to Italy regularly and in the past decade, not much has changed. In this idyllic seaside town there are numerous properties for sale, many of which have been on the market for two years or more. In fact, they’re still talking about the financial crisis as the reason why things are so bad economically. When I was here in 2009 and 2010, I totally get why they were talking about the global impact of the financial crisis. But a decade later, I don’t think you get to use that excuse anymore. A decade later it’s called the new normal and there needs to be an acceptance of the situation and the that it will take bolder steps to create more economic activity. 

Many of the properties we looked at were either waterfront properties or across the street from the sea. These are either single family homes or multi-family buildings facing the water. Many of them are distressed properties with visible signs of deferred maintenance. Sellers seem to be reluctant to reduce prices and the emphasis seems to be on the asset price and not the cash flow generated by the asset. This stands in stark contrast to the more fluid notion of valuation that we have in North America that values an asset as a business and that valuation is based on multiples of net income, or what we call the cap rate. 

This week, the local news in Italy is talking about the widely anticipated interest rate cut in Europe. This would be the first interest rate cut since 2016 and outgoing ECB chairman Mario Draghi’s final move before he steps down in October. 

But it also raises practical questions about how much more the ECB can accomplish with its current toolbox. The bank’s key interest rate is already below zero and its balance sheet has swollen to around 40% of eurozone economic output, double that of the Federal Reserve.

I believe that with interest rates already so low, the economic stimulus that would result from a lowering of rates is unlikely to have any measurable impact. Accompanying the rate reduction it is widely anticipated that the central bank will also participate in another round of bond buying. That’s code for printing more money and then buying the bonds. Printing money could have a stimulating effect, but here too it’s like a drug addict who becomes addicted to the drug and eventually develops a tolerance to the drug and needs more and more each time in order for the drug to have an impact. 

So what does this mean for us as real estate investors?

If Europe lowers interest rates, that could put pressure on other central banks around the world to do the same. The US news media have been reporting that the Federal Reserve is predicted to drop rates somewhere between a quarter point and perhaps as much as half a point at the July meeting coming up in a few days.  

For us, as real estate investors, lower interest rates are a good thing. They make the cost of doing business lower, and we can ultimately translate that into higher profits.