Tighter financial conditions, such as interest rate hikes have affected commercial property prices by making it more expensive for investors to finance new deals or refinance existing loans, a new report by the International Monetary Fund stated.

The report, titled, “Commercial Real Estate Sector Faces Risks as Financial Conditions Tighten,” said this trend was lowering investment in the sector.

It added that the stringent financial conditions would also have an indirect impact on the sector by slowing economic activity, reducing demand for commercial property such as shops, restaurants, and industrial buildings.

The IMF said financial conditions were important drivers of commercial real estate prices, as they help to explain the divergent performance of the sector across regions during the pandemic.

The report read in part, “In general, economies with easier financial conditions (that is, lower real interest rates and other market conditions that make it easier to obtain financing) saw a smaller decline in commercial property prices during the pandemic and a faster recovery.

“Commercial property prices have also been higher in countries which implemented relatively less stringent public containment measures to control the spread of the virus, rolled out larger fiscal support packages, and have a higher vaccination rate.”

According to the Washington-based lender, a sharp tightening in financial conditions could put the commercial real estate sector under renewed pressure.

This, it said, was especially in regions where economic growth prospects were weak and if stringent containment measures need to be put in place to curb new waves of infections.

It said disruptions in the commercial real estate market could in turn potentially threaten financial stability through the connectedness of the sector with the financial system and the broader macroeconomy.