Tag: high return

Bank of Spain: Avg. Yield On Housing Was 8.8% In 2015

22 March 2016 – Expansión

Investment in residential property is strengthening due to its low risk. In 2015, the gross yield on flats – rental income plus (property price) gain over one year – recorded its best year since the real estate boom.

As the recovery of the residential market gains strength, so housing is becoming an ever more attractive investment. Nowadays, buying a property to then put it on the rental market is an operation with high returns and low risk.

In other words, the option preferred by long-term investors. Not surprisingly, housing closed 2015 with an average yield of 8.8%, the highest annual figure since 2006, according to data from the Bank of Spain.

The body governed by Luis María Linde takes into account not only the gross rental yield (which stood at 4.6% as at December last year), but also the gain (in property prices) over 12 months, which adds a further 4.2 percentage points to the figure. As a result, many small and medium-sized investors have set their sights on the residential market, as they seek refuge from the low profitability of other investments. The return on housing is six times greater than the 1.44% offered on public debt over 10 years, and 22 times higher than the 0.4% yield offered on deposits. Meanwhile, the performance of the Ibex 35 is negative (down by 24.3% in February, according to the Bank of Spain).

8.8% is the highest return recorded at the end of a year since 2006, when the figure stood at 17.7%. Not even in 2007, the year in which the bubble peaked, was a higher figure recorded (then it was 8.6%). Between 2008 and 2013, returns were negative and 2014 closed with a yield of 6.4%, 2.4 points below the figure recorded last year.

“This data is very strong and confirms the change in the trend for the residential market, which began back in 2014”, says Julio Gil, Chairman of the Real Estate Research Foundation (FEI). “The combination of the positive evolution in terms of house prices and the trend in rental income have resulted in very high profitability, which confirms the stabilisation of the market and puts housing in a strong position versus other investment assets, particularly thanks to the very strong return-risk ratio”, adds Gil. Nevertheless, although “this indicator confirms the increasingly strong stabilisation of the market”, that “should not be confused with a situation of sharp growth”, warns the Chairman of FEI. (…).

As Gil warned, the sector is currently experiencing an impasse of high returns and low risk, something that is very rare. For this reason, experts are recommending investments in homes in good locations where high is demand. Central areas and suburbs of major cities are the best places to buy a property and then rent it out. The best options are one or two bedroom flats that are less than 80 m2, as they generate the best ratio in terms of rental income per square metre.

Moreover, rental prices are on the increase. Rent became more expensive in every autonomous region in 2015, with the exception of the País Vasco, where prices decreased by 0.3%, according to Fotocasa. It is the first time that rental prices have increased in 16 of the autonomous regions since the statistic, which the Bank of Spain uses in the absence of official sources, was first created nine years ago.

Original story: Expansión (by Juanma Lamet)

Translation: Carmel Drake

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