The concept of social interest associated with housing may well squeak in these times compared to the usual keys to savings such as profitability, liquidity and risk. But the reality is that Spaniards continue to allocate a good part of their savings to brick to the detriment of financial investment in a ratio of four to one. And not only to acquire the first home, but also to enjoy a second residence or to buy looking for rental income.
Unlike what happens in financial markets, in housing the data is not very homogeneous. Those provided by the Bank of Spain indicate that in the second half of 2021 in Spain the rise in house prices and rental profitability, added together, reached 7% in the interannual rate. The rise in the value of the houses contributed 3.3 points to this data and 3.7 points the gross profit (without discounting the expenses) for rent. These are the levels at which the real estate market moves well above the 0.4% achieved if government bonds had been purchased or the 0.5% for bank deposits. Of course, 7% of the house is very far from the gain on the Spanish Stock Market in that comparison period: 31%. Thus, housing has not done badly during much of the Covid-19 pandemic.
But in recent months inflation has come to play strongly, which with preliminary data for November stands at 5.6% and which will be an important variable to finally extract the real profitability (nominal minus inflation) on any investment and also in the house.
Robustness in Covid-19
It is clear that in 2021 house prices have risen and that they remained unexpectedly solid during the contagious 2020. Luis Corral, CEO of Foro Consultores Inmobiliarios points to Madrid, Barcelona and Malaga as the capitals where there has been the greatest demand housing and hence the increase in prices.
Only the Stock Market has exceeded the profitability of housing in the last year
Andrea de la Hoz, senior analyst at the Real Estate Appraisal Studies Service (Tinsa), explains that the Mediterranean coast and the islands registered this year “increases above 6%, although taking as a reference the point immediately prior to the emergence of the health crisis, the variation registered since March 2020 is around 4% nationally (especially large capitals and metropolitan areas) ”, he indicates. Some increases that for the Tinsa expert are due to the decoupling between demand and a supply that “reduced the rates of start of new construction due to Covid 19 and is now reacting with a certain delay and with the additional problem of the increase in the price of raw materials ”.
And he adds: “The residential sector at the moment is one of the most attractive investments due to the uncertainty regarding the persistence of inflation, low interest rates and the lack of more profitable alternatives at the same level of risk”, he concludes . A vision that does not reach the emptied Spain where, according to its own data, price falls are collected this year with Palencia (-12%), Soria (-7%) and Badajoz (-3%) in the forefront.
An unsatisfied demand
Luis Corral shares this vision and points out that demand will continue to be high as it has been up to now. “We are at a high point in the market with price increases in new and used housing. In turn, rentals are contained because there is supply, due to the transition from tourist to traditional rental, although this may be temporary. With all this, investing in housing or parking spaces can be a good option, but it also requires a good analysis ”, he explains.
For rent, 2 and 3 bedroom homes are the most demanded
The solutions director of urbanData Analytics, Manuel Cacho, considers that it is still a good time to invest in real estate because, despite Covid-19, we are in a mature cycle. “Some areas of Spain show slowdowns, more mature markets that could react with downward trends to negative macroeconomic movements (employment, GDP, cost of financing, etc.); factors that could alter the effort rate and slow down growth ”. But he assures that in any case “the cycle should maintain its momentum at least for the next two or three years ”, if there are no unexpected negative events.
It is important to remember that buying cheap does not mean higher profitability. The quality of the asset, the economic prospects of the area, communications, good services, endowments and good locations with homes close to business centers, companies or universities will enjoy greater demand and will also make the sale easier if the investor needs liquidity.
The gross profitability without discounting the expenses of the landlord (IBI, community of owners, municipal taxes, etc …) is difficult to quantify. The Bank of Spain places it at around 3.7% on average in Spain, while in a recent report the Fotocasa portal places it at 6.4% in the third quarter of this year, with a decrease of 0.6 % compared to the same period of the previous year attributed to the fall in rental prices during the year. Despite this small setback, this study indicates that the pandemic has placed real estate as a safe-haven investment.
The profitability of the rental is just over 4% in Madrid and Barcelona, according to Tinsa
Luis Corral places the average profitability in Spain now between 3.5% and 4.5% and Catalonia and the Community of Madrid are areas that offer good returns for this purpose of renting. According to data from Tinsa for the third quarter of 2021, the gross rental profitability registered a general increase in average values and stands at 4.4% in the city of Madrid, 4.1% in Barcelona and reaches 5% in Zaragoza . The center of Barcelona (Ciutat Vella) and that of Madrid have somewhat higher returns than their neighboring districts. Apart from this fact, the center-periphery scheme with respect to contained and higher returns, respectively, is still evident in these capitals and marks the general pattern.
Manuel Cacho stands out as the most profitable cities Seville or Valencia, with average yields of 5.8% and Madrid, Granada, Barcelona around 5% in the third quarter of this year, which remain stable markets with low risk. But Cacho figures at “6.7% on average (without discounting expenses and empty periods of the property) the profit on a national scale, according to our data for the third quarter.”
Options to invest in 2022
One of the recent fashions especially in large capitals in the last three years has been the so-called built to rent (build housing for rent) by, above all, large investors. The difficulty of access to housing, especially for young people, has led to this strategy, sometimes completed with rent-to-own, since finally part of the payments could be deducted from the final price.
This phenomenon may begin to be reversed with the new housing legislation that penalizes large apartment owners and whose effect, according to the most critics, would be to put more houses for sale and reduce the number of properties for rent.
For Luis Corral, large capitals already have expensive prices and, obviously, the profitability for rent is lower, so “the first crowns of large cities are a good objective. Another option is tourist housing because, although international demand suffers, the interior will continue to pull and more if we continue with the pandemic situation and with variants that can lead us to restrictions again ”, he concludes.
The solutions director at urbanData Analytics recommends a “micro-localized analysis to identify the specific types of housing that present investment opportunities for rental purposes”. And since their signing, they consider the use of new technologies such as artificial intelligence and big data necessary to detect those properties with better possibilities of revaluation.
Size determines demand
What home to buy? It can be one of the questions that savers who want brick ask themselves. And, in this sense, size may be one of the keys. The CEO of Foro Consultores Inmobiliarios addresses this issue to buy successfully. “In 1 and 2-bedroom homes there is always more tenant turnover. The most popular home is between 2 and 3 bedrooms. Although we do not forget the typologies of 3 and 4, which can attract a more permanent audience. And if they are well distributed and close to university centers, they can be aimed at students ”, he explains. And he adds: “the garage and the elevator increase profitability, as well as common areas. It can compensate to pay more in the purchase and that the house has more services because it will be more attractive and it will be possible to aspire to a higher rent ”.
More need for parking spaces
The demand for rental places as a result of the pandemic has increased, according to Luis Corral. There is a clear preference for private transport to avoid contacts and infections as much as possible. Coupled with this, the price of the parking spaces is affordable and the expenses are small, so that “the gross profitability ranges between 3 and 6%, depending on the area and the characteristics and can reach 7%” , concludes.
The outlook for residential real estate looks solid and attractive to investors for at least the next year and provided there are no black swans hovering over the economy. Now, one of the experts consulted leaves a small final lesson: “the best investment is to do it in yourself, buy the house that you like, which you are going to enjoy immediately and in the long term.”