Bank Of Spain: Housing Yields Soar By 10.9% In Q1 2016

18 July 2016 – Expansión

(…). According to the latest data from Bank of Spain relating to the first quarter of this year, the average gross annual return on housing amounted to 10.9% in Q1 2016. Three months earlier, the same indicator amounted to 8.8%, which gives an idea of how much the pace is speeding up.

This gross yield figure measures the combined effect of the appreciation in house prices, plus the income obtained from putting those houses up for rent, before tax. In other words, the figure takes into account not only the amount that each investor obtains from renting out his/her property, but also the amount that he/she would earn from selling it after twelve months, which is the most important information for investors.

Specifically, house prices rose by 6.3% YoY during Q1 2016, whilst rental income generated additional returns of 4.6% over and above the value of the asset. And that profit may increase over the coming years, given that Fotocasa calculates that rental prices increased by 4.8% YoY in June, the second highest rise since 2006.

Moreover, this figure is more significant in the context of depressed interest rates, where investments presented as alternatives to fixed income options are shining. For example, housing yields are six times higher than the returns on 10-year Spanish public debt, which is the reference rate used by the financial supervisor; moreover, housing has also offered a safer refuge against uncertainty than the stock exchanges in recent months. (…).

This gap between housing yields and the returns on other assets means that now is a great time to invest in rental housing, for both individual buyers and investment funds, given that the cost of mortgages are also at historical lows.

In fact, the College of Property Registrars indicates that last year, 12.71% of house purchases were made by legal persons, which shows the interest that housing is sparking amongst companies, due to the double returns it offers.

The business model of these businesses and individuals is clear: obtain fixed income from renting out the asset, for an amount that comfortably exceeds the associated operating costs, and also benefit from the appreciation in the property value, so that they can more than double their returns.

Overall increases

In addition, it is a pretty safe bet, given that house prices are rising in most autonomous regions (and the improvement in the labour market should prolong this rise) and rental prices are rising four times as quickly as purchase prices, according to data from Fotocasa. (…).

The percentage of citizens who prefer to rent rather than buy is increasing, from 19% to 21.2% of Spaniards in 2015. In the last three years, the rental market has absorbed more than 1 million homes and is 42.5% larger. For this reason, investors looking for high returns have thrown themselves into the hunt for properties in established locations, with demand, in order to rent them out.

Location and quality

In fact, the experts recommend paying special attention to the location and quality of housing, because Spain is no longer a homogeneous market…but rather a market evolving at two or three speeds, in which prices have not bottomed out yet or are stable in certain cities and neighbourhoods, whilst prices are clearly recovering in others. (…).

Original story: Expansión (by P. Cerezal)

Translation: Carmel Drake

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