Investment Opportunities in Real Estate

25 May 2015 – Expansión

The real estate sector is becoming more attractive as an investment. It’s time to buy, especially in the exclusive neighborhoods of large cities and in some areas situated along the coast. Renting is a profitable option as well.

Real estate investment is gaining luster. More and more experts say the market has bottomed out and now is the time to start buying.

Apartment prices, which fell by 50% on average since the boom of the real estate sector, are experiencing a clear stabilization process that shows some signs of recovery. Tinsa, the appraisal company, highlights Barcelona, ​​Palma de Mallorca, Malaga and Burgos as the cities that experienced year-on-year price increases between 0.1% and 5.4%, over the first quarter. On average, prices have picked up by 3.3% in the first quarter, according to the appraisal company, reflecting more optimistic data.

Keys to Buying Properties

Price

Housing prices have fallen by almost 50% on average since the housing boom. They have bottomed out and their seven-years decline came to an end in 2014.

Location

Property location is indeed important, as the most sought-after properties are in the center of big cities and certain areas along the coast.

Financing
Mortgage lending has been revived, having increased by 29.2% in February and expected to remain on an upward trend throughout the year.

But beware, experts warn that although there are opportunities to invest in, not all are worthwhile, as there are still homes being sold at above market price. However, in popular areas, waiting more to buy property may be a mistake, as apartments will become increasingly more expensive and receive more offers by interested buyers.

Location is key. The most profitable places to invest in are the best areas of large cities, especially Madrid and Barcelona, as the most exclusive coastal areas, like Costa del Sol. For example, the annual gross return on a 100-square-meter apartment in a prime location in Madrid is around 5.2%.

Banks are selling  over 150,000 properties through their websites. Currently, discounts are less aggressive than during the crisis and there are many more vacation homes available. The steepest discounts are to be found outside ‘prime’ locations, but are the most difficult to turn profitable.

Profitability

Currently, one of the most recommended strategies is buying to rent out. For the president of the Foundation for Real Estate Studies, Julio Gil, “today the purchase of housing for rent is one of the best alternatives for small investors, given the risk-return trade-off.”

One can get an average return of 4.7%. In the case of commercial space, one can obtain a return of around 7%; office space – 6.4%; and parking space – 4.6%, according to a report by Idealista.

These returns are well above the 1.6% offered by the Spanish Treasury on 10-year bonds. Meanwhile, short-term government securities (12-month) are below 0.5%, on average, according to the Bank of Spain.

One aspect that reflects the revival in the real estate market is mortgage lending. It rose 1.6% in 2014 and reached 203,000 mortgage loans, coming out of its seven years of decline. In February, the improvement has been drastic, with a rise of 29.2%. However, the figures are still far from an equilibrium point, which, according to the Valuation Society, stands at around 450,000 per year.

Financial institutions are optimistic and say new credit will rise this year, as do analysts from Moody’s. They believe the increase in mortgage lending will drive demand in the real estate sector, which in turn could help increase property prices.

Financial institutions are aiming to attract customers and gain their loyalty in this recovery phase. Most banking deals are made with a variable rate. The best deals have a fixed differential added over the Euribor rate – between 1% and 1.75%. In addition to the differential, it is important to also note that in some cases there is an opening and cancellation fee, while in others not. Moreover, each entity usually requires a minimum monthly income of between 500 and 5,000 euros. In addition, in almost all cases, hiring other products such as insurance, pension plan or a credit card is required.

Interest rates from 2.4% to 5.5% in fixed-rate mortgages

How to Reduce Risks When Renting a Home

Realtors, housing rental companies, insurance companies and public institutions offer customized products for homeowners who want to make their contracts ironclad before renting out their property. If you are seeking security and to limit risks as much as possible, you can choose the option that best suits your needs.

For instance, the “Plan Alquila” (Rent Out Plan) in some regions, such as Madrid, manages and acts as an intermediary between homeowners and tenants. The service requires a one-time payment of EUR 190.43 (VAT included), regardless of the years they have been renting. It includes free insurance for the first year, covering all possible non-payments. From the second year onward, owners must purchase insurance on their own if interested. Real estate companies often offer a special service which, among other things, includes the verifying the solvency of tenants. This prevents renting out to defaulting professionals.

They also tend to apply a client filter that reduces the risk in renting out. In some cases, they work with companies specializing in offering insurance services tailored to customer needs. The cost to the owner is usually a percentage ranging between 3% and 6.5% (depending on what is included) on the lease income. You can also purchase insurance directly from insurers. For an average rent of a thousand euros per month, the annual cost would be between 466 (Caser) and 478 euros (Mapfre), according to the simulator of the specialized company, Arrenta.

At this annual price, the insurance policy covers the collection of unpaid rents and even on-time payment in case of tenants  defaulting. It also covers damage by vandalism of up to 3,000 euros, in most cases with an exemption of at least 300 euros. Some insurance services take into account urgent home repairs. Insurance packages are tailor-made and the final price depends on particular characteristics and price at which the property is rented.

Original story: Expansión

Translation: James Leahu

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