Welcome to the London property podcast, your go-to source for navigating the complex and ever-changing London real estate market. Our digital marketplace provides informative and educational content from industry leaders through podcasts and videos. We cover various aspects of the real estate experience, including buying and selling, finance, law, tax, construction, design, and more. Join us as we delve into the latest trends and developments in the market and gain valuable insights from our panel of experts.

Farnaz Fazaipour:
Hello, and welcome to London Property, the home of super-prime. I’m your host Farnaz Fazaipour. Today, we’re delighted to welcome back to the show Hossein Fateh, the CEO of Cloud HQ. Welcome to the show.

Hossein Fateh:
Thank you for having us.

Farnaz Fazaipour:
So why don’t you tell us a little bit about Cloud HQ and what you do to put things into context for us before we continue.

Hossein Fateh:
We have two companies, Cloud HQ and Cloud Capital. Cloud HQ is a developer wholesale of data centers, primarily serving large tech companies like Microsoft, Amazon AWS, Google, Oracle, and Meta. We handle everything from finding locations, securing power, fiber optic routes, planning, building, and providing long-term leases to these companies.

Farnaz Fazaipour:
That’s your core business. Today, we’re talking about the effects of interest rates and inflation on the real estate market. You’re well-positioned to educate us on this subject.

Hossein Fateh:
Inflation and interest rates are directly related and impact long-term debt. Real estate valuations correlate with government bond rates. The risk-free rate is the long-term government bond rate, and real estate prices are based on cap rates, which factor in this risk-free rate. As interest rates rise, cap rates increase, affecting property valuations.

Farnaz Fazaipour:
So, cap rates are tied to the risk-free rate.

Hossein Fateh:
Yes, the cap rate is the premium on the cost of the long-term treasury. Inflation affects real estate by making the poor poorer, and governments use interest rate hikes to control inflation. The cost of goods and services, including labor, contributes to inflation. With a tight labor market, inflation becomes challenging to manage.

Farnaz Fazaipour:
How does inflation impact buyers’ purchasing power in real estate?

Hossein Fateh:
As inflation rises, interest rates increase, impacting the cost of borrowing. Buyers may need less leverage, and the cost of borrowing becomes higher. Even if the cost of debt is fixed, new buyers entering the market may demand higher returns, affecting property valuations.

Farnaz Fazaipour:
So, the entry point for new buyers is crucial in an inflationary market.

Hossein Fateh:
Exactly. Timing is crucial, and buyers need to be cautious not to overpay in a changing market.

Farnaz Fazaipour:
How can investors protect their real estate investments in a high inflation scenario?

Hossein Fateh:
Ideally, fixing interest rates long term is the best protection. Those who didn’t do this may need to sell, downsize, borrow from family, or use savings to pay down debt. Waiting for the market bottom to make strategic acquisitions could also be a defensive strategy.

Farnaz Fazaipour:
So, strategic timing and financial preparedness are key.

Hossein Fateh:
Absolutely. Being well-capitalized and having the ability to act quickly in the market is crucial.

Farnaz Fazaipour:
Switching to the impact on construction costs, how does inflation affect the cost of construction?

Hossein Fateh:
Construction costs are highly correlated with inflation, with labor and materials making up a significant portion of expenses. In a tight labor market, labor costs rise, and materials and equipment costs increase with inflation.

Farnaz Fazaipour:
So, managing construction budgets becomes challenging in an inflationary environment.

Hossein Fateh:
Exactly. Property developers may need to raise rents to protect yields amidst rising construction costs.

Farnaz Fazaipour:
Now, looking at the residential market, how do changes in interest rates and inflation affect homebuyers?

Hossein Fateh:
If interest rates rise rapidly, homebuyers with variable-rate mortgages may struggle. Those who fixed their rates earlier may fare better. Affordability becomes a challenge, and some may need to sell or borrow to cover increased mortgage costs.

Farnaz Fazaipour:
So, fixed-rate mortgages provide more stability for homebuyers in uncertain markets.

Hossein Fateh:
Yes, fixed-rate mortgages offer protection against rising interest rates, providing a sense of financial security for homeowners.

Farnaz Fazaipour:
Moving on to commercial real estate, how can investors take advantage of inflation in this sector?

Hossein Fateh:
Investors can identify properties where tenants are paying below-market rates and negotiate favorable deals. Buying at the right price and renegotiating rents when they roll can be a strategic move.

Farnaz Fazaipour:
So, finding

opportunities with below-market rents is a key strategy in leveraging inflation in commercial real estate.

Hossein Fateh:
Exactly. It’s about recognizing the market dynamics and making informed decisions to capitalize on potential opportunities.

Farnaz Fazaipour:
Thank you, Hossein Fateh, for sharing your valuable insights on the impact of interest rates and inflation on the real estate market. It’s been a pleasure having you on Love Them Property.

Hossein Fateh:
Thank you for having me. It’s always a pleasure to discuss these critical topics.

Farnaz Fazaipour:
And to our listeners, thank you for joining us on this episode of Love Them Property. Stay tuned for more engaging discussions and expert insights on the London real estate scene. Until next time, happy property hunting!