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Bank Of Spain: Residential Rental Yields Rise To 5%

18 May 2015 – Expansión

Residential market / The average annual return on rental properties is equivalent to 3.1x the return on public debt – a historical record. Demand for rental property has soared by 42.5% in three years.

After seven-years in decline, it seems that the housing sector is back. The residential market is oozing optimism once again, although it is also full of caution, learned during the post-bubble era, and  uncertainty, inherent in a recovery that is still recent.

But the data is improving and housing has become a good investment once again, above all due to the significant rental returns offered nowadays. Investors looking for yields that exceed those on deposits and public debt are on the hunt for properties in good locations, with high demand, with a view to buying them to let.

The data endorses this trend, since the rental income for a residential property offers an annual gross return of around 5%. On average, 4.7%, according to the Bank of Spain. It is the highest percentage recorded since June 2003, during the height of the housing bubble, although other reports, such as the one published by idealista, puts the figure even higher, at 5.3%.

The gross yield is a percentage of the total price of the house covered by the annual rental income. This yield, published by the Bank of Spain, also takes into account capital gains.

Taking into account the data from the body led by Luis María Linde, the average annual rental yield is no less than 3.1x the return generated by public debt on the secondary markets during the last quarter (1.5%). That is a historical record for this comparative ratio, which dates back to 1991. Meanwhile, bank deposits offer a return of 0.6% each year.

What does all this mean? Simply, that the moment is ripe for investment in buy-to-let housing, especially for small investors. The price of homes is beginning to increase and so are rentals, which means that the market is at an impasse of high returns without much risk. Moreover, the percentage of citizens who prefer to rent rather than buy has risen sharply, from 11.4% in the boom years to the current rate of 19%. In the past three years alone, the rental market has expanded to include one million more homes; it has grown by 42.5%.

On the other hand, the price of homes is starting to rise, specifically by 2.65% during the first quarter of the year, according to the registers. This trend towards stability in terms of property prices points to an easing of returns in the rental market, and so analysts believe that now is the best time to invest (rather than waiting to invest over the next few quarters).

According to the experts, the prime areas of the large cities are those that offer the safest opportunities, due to their significant demand, although without exorbitant returns. For example, the Madrid neighbourhood of Retiro, where the average price per square metre for sale is €3,289 and for rent is €11.6/m2/month, according to the index prepared by IE Business School and Fotocasa. A property measuring 100 m2 with these parameters would have an annual return of 4.2%. A second-hand home measuring 100 m2 in the Goya neighbourhood (Madrid) would have a return of around 4.7%.

“Homes in the best locations are the most attractive to rent. They will go up in price and there is no risk of default or lack of demand”, says the real estate consultant José Luis Ruiz Bartolomé. “It is possible that rental prices will also start to rise, although by less that sales prices. The rental margin will narrow, but that is because certainty will increase as well; I do not see that as a bad thing”, he adds.

And in the peripheral areas? “You have to look at where there is more demand than supply”, says Ruiz. Julio Gil, President of the Foundation for Real Estate Studies agrees: “It is the best option for small investors, due to the returns and minimal risk”.

Some properties offer higher yields than housing, such as commercial premises (7.2%) and offices (6.7%), according to idealista.com. Garages yield 4.5%.

Original story: Expansión (by Juanma Lamet)

Translation: Carmel Drake