Housing rentals, currently the most profitable investment
They generate 11% and beat bonds, deposits and the stock market.
Housing rentals in Spain have become the most profitable asset for any investor who wishes to get the largest return out of their capital. With interest rates currently flat, and the stock market hemorrhaging red ink due to uncertainty about an economic slowdown, the ROI offered by other financial assets remains negative or flat, compared to real estate which continues to multiply profitability several times over, according to data published by the Bank of Spain last Wednesday in its latest report on the housing market.
The difference between the average returns obtained with rental housing–versus other financial assets such as public debt or equity–leaves little doubt as to why the real estate market has been attracting the interest of small, medium and large national and international investors for the last two years. This becomes more obvious when one takes into account the fact that rental or purchase prices in certain areas has evolved independently of the purchasing power of households.
Salaries grow on average six times less (0.7%) than rental income. The capitol required to purchase a house has increased both the amount of wealth consumers must allocate (32% of their gross income in the first year) as well as the number of years it will take to pay off this debt (23.3 years versus 22.8 in 2015).
According to the Bank of Spain, the accumulated gross return on housing rents for the last 12 months is already 4%, which is three times more than what can be contributed by a fixed-income model investment such as 10-year government bonds, which was 1.5% at the end of the last quarter.
If you look at alternative investments, such as certificates of deposits lasting between one and two years offered by the banks, the data of the supervising body indicate that the comparison is even more unfavorable than rent because, due to the policy set by the European Central Bank, these alternative investments barely contribute 0.1%. The Spanish stock market, which suffers great volatility on account of protectionism or uncertainties such as Brexit, offered a negative return of 9.6% until September. Except for Italy, other European markets suffer a similar dilemma; but Spain is, together with the Netherlands, the country where differences in profitability for investors are most evident.
Of course, “gross rent” only estimates part of what home ownership can offer investors today. When the Bank of Spain calculates the value of growth in rents –plus- the increased capital gains accumulated by homes over the last 12 months, average profitability shoots up to 10.9%; 7.5 times more than the bills of exchange, 110 times more than certificates of deposit; as well as protection against the kinds of losses which might be experienced when purchasing stock.
«The average rental price continues to rise in Spain and stands at 8.22 euros per square meter,» explains Beatriz Toribio, director of Estudios of Fotocasa, one of the sources of the Bank of Spain used to prepare its follow-up report. Toribio points out that the pace of growth has fallen compared to last year, when double-digit year-on-year increases were registered. «Even so, our data reveal strong price tensions in the main capitals of the country, which is striking especially considering that many of them have already exceeded the maximum prices of 2007 and 2008».
According to Fotocasa, rents in Spain have risen practically uninterrupted over the past four years. Madrid is the most expensive community to rent a second-hand home, with an average price of 12.92 euros / m2 per month. It is followed by Catalonia (12.09), País Vasco (9.76) and Baleares (9.66). On the opposite side, Extremadura (4.63) and Castilla-La Mancha (5.01) are the two most affordable regions with prices of in-tune to increases in wages.
Statistical averages hide differences in real estate markets, generally due to the market’s location. Financial assets are also more liquid than real estate. In either case, there is little doubt that interest in the rental market is an investment alternative rather than purely competitive compared to more liquid financial options. One-third of house purchases are made without financing. «As long as interest rates remain negative,” explains Susana de la Riva, head of Marketing at Tinsa, “real estate will maintain an extra attraction,».
Barcelona is, by far, the most expensive city to rent a home. A loft of 60 square meters is rented for 964 euros per month, higher than the new interprofessional minimum wage provided by the Government. A house of 95 square meters, like those that the Bank of Spain uses as a reference for their indicators, requires an income of 1,600 euros. Madrid, Gavá and Sitges, located in the province of Barcelona, follow the Catalan capital as the most expensive markets.
Price control in the next law
The Government plans to approve the Urban Rental Law by decree in the coming weeks; it has warned that it will limit price increases in certain areas. According to sources familiar with the government’s deliberation regarding this text, the initial proposal was to offer tax incentives to owners who destined houses to the collectives with access difficulties. Now, Finance and Economy must review the document created by Development (Fomento). But the problem of housing is one of the hook flags of Podemos, which requires price control in point 3 of its October budgetary pact with the Government. The measure can have a big impact on the growing tourist rental market where platforms such as Airbnb have revolutionized the center of the cities. Funds such as BlackStone or Cerberus, which have bought most of the assets sold by Santander, BBVA, CaixaBank or Sabadell, have already warned the Ministry of Economy that restrictive regulation could halt the development of more rental homes.
Source: El Mundo.