Bank Of Spain: Residential Yields Rise to 8.6%

23 October 2015 – Expansión

Now is the most profitable time since the burst of the real estate bubble to buy a home. At least that is according to official figures: the average gross annual yield of homes currently amounts to 8.6%, a level not seen since 2007, the year when prices and sales peaked in the residential market. That is the latest data published by the Bank of Spain relating to the first half of the year.

The total gross yield on a residential property “is calculated as the estimated gross income from rental plus any capital gain”. In other words, it takes into account not only the amount an investor would obtain each year from renting out a property, but also the gain that he would make by selling it after twelve months.

This indicator, which is key for buyers looking to acquire homes as safe investments, soared during the second quarter of 2015. In March, the gross annual return on homes increased to 6.180% and in June, it rose again, by 2.41 points to the aforementioned figure of 8.6%.

That means the residential yield is five times greater than the return currently offered on 10-year debt (1.75%). Bank deposits offer a return of 0.5%, according to the body headed by Luis María Linde.

What does this mean? Put simply, it means that now is an ideal time to invest in rental property, for both small and large investors. (…).

We are living in an impasse of high returns with minimal risk. House prices are beginning to rise (by 2.6% in 2015, according to Servihabitat) and so are rental prices, although at a more moderate rate (by 1%, according to the IESE index and Fotocasa).

Moreover, the percentage of citizens choosing to rent rather than buy has increased significantly, from 9.6% during the real estate boom to its current rate of 15.4%, according to data from the Bank of Spain. Over the last three years, the rental market has welcomed one million new homes and as such has grown by 42.5%. For this reason, investors looking for higher returns have launched searches for properties in areas that are well established and have high demand, to lease them out.

Eight year high

8.6% is the highest figure seen since September 2007, when the return on buying a home reached 12.1% per year. At that time (eight years ago), the residential sector was immersed in a spiral of hyperinflation and credit. The bubble was about to burst, but politicians and businessman alike were in denial, as they tried to sustain the over-heating of the real estate sector. In other words, to mislead buyers.

It was then that the residential market started to decelerate, in other words, to deflate. During the next quarter, the return on homes decreased to 8.5% and from then on, the figure did not stop falling; it entered negative territory in the third quarter of 2008 and reached its negative low (a return of -11%) in September 2012.

Now the situation is radically different. After years of depression, stigmatisation and hangovers, the recovery of the residential sector has finally begun. Gradually and in a moderate way, homes are getting more expensive, sales are recovering and the mortgage market is reactivatin. (…).

The phenomenon happening right now is something that rarely happens, even during changes in the cycle because investors are finding find bubble-like returns, but without the bubble itself.

Original story: Expansión (by Juanma Lamet)

Translation: Carmel Drake