Is it a good time to invest in the real estate sector?

As an expert in the real estate sector, I will state the reasons why it’s interesting to invest in properties and the reasons why I think it isn’t. The purpose of this article is for each one to make their own conclusions. And as a real estate and tax advisor, I will give my opinion.

 

Yes it is interesting to invest in properties

• If you have liquidity in your bank, investing in real estate is much better than any other investment considered safe, such as bank deposits, state bonds or fixed income. These types of investments “ensure” gross annual returns ranging from 0.5% to 2.5% at most. In the real estate sector, according to typology and location, annual yields ranging from 3.5% to 6.5% can be obtained in addition to the capital gain expected from the sale of the property in the future. With these returns, it is normal that investor appetite is high, which drives up real estate prices.
• Banks are giving loans. This is normal, it’s their main business. Banks were born to lend money to people and businesses and it’s their main source of income. If money is lent, there is more liquidity and the investor’s interest increases, which raises real estate prices.
• Interest rates are the lowest in history. You will never be able to get a loan with such a low interest rate (without taking into account the difference or margin set by the banks). With low interest rates and the injection of money they are giving, investment in the real estate sector is interesting, causing upward pressure on prices.
• Many foreigners come to Spain in search of a better climate, relaxation and security. This generates an increase in house prices as there is an increase in demand, but supply continues at the same level and even diminishes in some areas.

·         There is a change in the tendency of many Spaniards to buy a property for rent. If rent demand increases, rents increase, and therefore the interest to invest in the real estate sector increases, due to healthy returns.

·         Brexit, which is currently causing uncertainties in the UK economy and a devaluation of the pound, makes what has historically been very safe to invest, especially in prime areas like London, not so safe any longer. Current and future millionaires who had one of their properties in the UK, are leaving, and many of them will come to Spain. This flow of capital increases the prices of properties.

·         Unfortunately, more and more single-parent families exist. The trend is for the “nuclear” family unit to go from being four people to two or even one. This growth in demand for sociological reasons drives up real estate prices.

It isn’t interesting to invest in properties

• Although banks are giving credit, they are not giving to everyone who applies for credit as they did before. They are only giving 80% of the valuation at most. Therefore, you must have enough cash to have the remaining 20% of the value of the home, plus the taxes associated with the purchase.
• Interest is the lowest in history, so the only path they have is upward. With the increase in taxes, with a mortgage of twenty or thirty years, surely you will end up paying more interest than planned.
• To obtain a return means you have to rent out the property. You have to be very careful if tenants rent the property as their first home. If at any time they stop paying the rent, even for one or two months, profit decreases considerably. In addition, legal expenses would be incurred and the process can be extended for years. Having a family that does not pay the rent and that uses the house as their first residence is complicated in our country.

·         It is difficult to find new builds, especially in large cities. Therefore, any second-hand property that is for sale, will sooner or later need an update, either the flat itself or the building it’s situated in. This increases the cost of owning a property. This cost increase has an impact on profits.

·         Currently, there is a belief that fiscal pressure will grow. It is clear that we have not yet emerged from the crisis, so I do not know if taxes will increase (everything indicates that they will). However, what is certain is that they will not go down. Consequently, if taxes increase, returns will fall.

Obviously, we have to weigh the pros and cons of investing in real estate. It’s a personal investment, and each of the points “weighs” differently with each investor.

All these impressions are personal opinions and there will be people who won’t agree with me. All feedback is welcome!

Have a good day!

Martí