Is buying property in Europe today a smart investment?
"Be realistic and carry on," says real estate investment strategist Pol Robert Tansens as he discusses what returns and risks buyers should expect when buying property in Europe today.
Although several European countries are still recovering from property and economic crises, international investors are scrambling to buy European real estate and driving a revival in European property markets. But what is the attraction to buying property in Europe, and more importantly, can investors expect a good return on their real estate investments in the current crisis climate?
As head of the real estate investment strategy at BNP Paribas Fortis, wealth management is Pol Robert Tansens’ area of expertise. Here Pol takes a look at the major real estate trends in Europe and the outlook international buyers can expect if they choose to invest in property in Europe.
What’s so attractive that investors are flocking to crisis-hit Europe?
At first sight it is a bit strange to explain how real estate in crisis-hit Europe has continued to outperform many other asset types in the past few years.
Just a few years ago, everybody was predicting the end of Europe — especially the end of continental Europe — but instead, what we have seen since is ever-increasing property prices as investors flock to the markets, particularly in the UK and many places in continental Europe, such as Paris and the main cities in Germany.
But real estate markets in Europe, whether commercial or residential, are actually very expensive today. Considering that crises are high and property assets are trading at incredibly low property yields, this makes the underlying value of properties very high.
So how is it possible today that a continent in deep economic crisis with a complete lack of inflation is attracting investors from around the world? This has been the first major real estate trend these past years.
The answer is simple: it’s all linked to the monetary policy of the European Central Bank (ECB), and has nothing to do with real estate. With the ECB’s loose monetary policy of keeping interest rates artificially low, today’s investors don’t see any other possibility than investing in real estate — buying stocks can be too risky because they are volatile and bonds are also expensive considering yields have etched lower and lower. So investors say, why shouldn’t we buy real estate? Even if it is expensive and the yields are not high, at least real estate offers a cash yield or a net rental income of a few percent, which is a high return compared to zero interest offered on other assets. But, in a way, it is also dangerous that property prices are supported by this fundamental and also by the monetary policy of the ECB.
There’s another explanation why European real estate is going so well. I remember I went to Asia five years ago and they told me I could talk about everything except European investments. But the reality today is that emerging markets are in real trouble, with economic contraction, turmoil, lower commodity prices and volatility in currencies. Now rich investors from emerging markets are turning to Europe because they had to diversify due to such problems. So for a continent that was a complete write-off five years ago for investors, today all those same investors are investing in Europe.
So everything we have been predicting is the exact opposite: today there are good-performing property markets in general with lots of international capital flows.
In essence, real estate is equivalent to a secured bond, especially if you buy in the prime property markets in UK, Paris or Germany. But anywhere in Europe, you still have the potential for a better economy and higher inflation positively influencing your investment. I think this is the main reason why real estate in continental EU and recovering markets has performed so well.
Should you worry about low inflation?
Some investors ask about the lack of inflation, and whether it still matters. You have to understand that we have always sold real estate on the following argument: because of inflation, your investment will always be protected — it’s a hedge protection. But today we don’t have inflation or if we do, it’s a mere few percent. So when investors ask, does it still matter? Then my answer is yes.
If for one reason or another, inflation were to come back in the coming years — although nobody really knows what’s going to happen — then real estate investors could benefit because, besides a potential rise in the value of your investment, typically rental contracts are indexed and generally reviewed upwards on a regular basis, like in the UK.
Suppose we have a lack of inflation for years and years — a little like we’ve seen in Japan over the last 20 years — then that would be bad news for a property investor. In case of deflation, we will see a decrease of asset values as well, and that is no good news either. So for me, inflation still matters (and although I’m not too Catholic), I am praying today that we can have a return of a healthy inflation of say two percent in the coming years because we really do need that.
What will happen with interest rates and what actions should one take?
We have been predicting higher interest rates for years, and we have all been wrong. Today interest rates are still etching lower or stabilising at best, but they are certainly not rising. Europe is now in a situation with interest rates at around zero.
Without any inflation, yields or potential profits will not rise. But in spite of all this, investors know that if they buy today, they also benefit from financing at a very low cost of borrowing. We see this trend almost everywhere in the world — housing markets are very popular as everybody is trying to finance or refinance their mortgage to acquire a home while mortgage rates are so low.
Many clients and investors ask about the artificially low interest rates: how long will they last? Another year, two or maybe three? Nobody knows for sure but what we do know is that one day interest rates will go up again. Then we might have a serious market problem because if you bought property — whether commercial or residential — with low yields of 3–4 percent, even a rise of 1–2 percent interest can have a serious influence on your profit return.
This is why my advice today is that when financing your real estate, it should be done at fixed rates. I disagree that buyers should even consider financing at floating rates because besides being dangerous, with interest rates so low why consider a floating rate? This is not necessary anymore.
At least then, even if interest rates were to go up later, your cost of borrowing would be fixed. Additionally, in the case that inflation rises, your cost of borrowing stays capped while your rental income can potentially rise in line with inflation. This is how, I think, real estate investors can make money in the future.
What kinds of returns can an investor expect in the future?
In the core and established markets of Europe — UK, France, Belgium, Luxembourg, Switzerland — it can be expected that returns will be positive but on the low side. You won’t make 10–15 percent a year — this is not possible in my opinion — but you might have a few percent a year cash return. In reality, the focus of investors should be on cash, not on capital gains, because core residential markets are already expensive. But if you were to buy in troubled markets such as Spain or Greece, you may have a chance of making capital gains if the economies continue to improve.
The commercial market is more or less the same. Either you buy in the established office and retail markets and expect a cash return of around 4–6 percent with only limited capital gains, or you buy in recovering markets —southern and central Europe, maybe in Ireland still, and the more regional cities in European countries — and there the returns could be higher but with much higher risks, too.
The euro is also weaker than it was a few years ago, so properties are essentially cheaper for foreigners, and investors could benefit from a strengthening euro in the coming years as well.
To summarise, I can tell you that real estate is in extremely high demand and it’s an interesting asset class. Still, investors should not overestimate their return expectations, they should ‘be realistic and carry on’, as I like to say.
Risky versus stable real estate: Which countries are good to invest in?
We need to be objective here. We have two European markets today.
On one hand we have the core, established property markets that hardly saw any crisis. On the other hand: real estate was perceived as a safe haven in main European capitals, such as London and Paris. The UK, France and Germany, for example, have taken the bulk of investment volume accounting for more than 70 percent of transactions.
Next to that, we have certain neighbouring countries which have not done so well in the past years — suffering severe property crises — especially in southern Europe, as well as some countries in the north and in central Europe.
Prices drastically fell in Italy, Ireland, the Netherlands and Greece, plus a number of other specific countries. There was also an extensive property crisis in the residential market in Spain, and to a lesser extent in Portugal. That being said, those markets have been in recovery mode since one or two years.
An investor now has the possibility to either invest in very expensive property in established European markets — but it is a secured investment at a low return — or to invest in those markets where prices have fallen but are recovering. Investors who are willing to take a bit more risk — in markets such as Spain, Italy or maybe in central Europe — could have a higher return but not without taking a gamble.
Europe’s ‘capital’ in Belgium, on the other hand, is in the middle of everything — it’s not performing like London, Paris or German markets, far from that. Brussels has not really participated in the huge property boom we’ve seen in the past year because both rents and values were relatively stable, and this is why we say, in a friendly way, that Brussels is kind of boring, property wise. The Brussels commercial and office markets are not in such great shape, either. You have areas close to the EU institutions that perform well thanks to EU occupancy, as well as other areas only 3–5km away where vacancy rates can go as high as 20 percent.
If you compare all this to London, where rents have gone up by dozens of percent, and property values have risen by 10–20 percent last year alone, we will never see that in Brussels or in other European markets.
So the old Europe today is offering opportunities both to very defensive but also to more opportunistic investors. Today we see a mix of investors — those who are investing in the core markets with an expectation of a few percent only, and those who are investing in European countries to benefit from the property market recoveries.
Should one consider a high-risk investment over a stable one?
Spain, of course, is a very popular country for buying property because housing prices fell by 30 or even 40 percent compared to peaks recorded in 2007, and now they are going up again.
In fact, many investors from Belgium and France are buying apartments in Spain — the numbers are outrageous. Spain is a popular holiday destination, and many investors get swept away while vacationing in Spain. But you need to be careful because even today, Spain still has an oversupply of roughly two million properties.
Additionally, if you buy in Spain, you have to think about the paperwork and that the buyer — or better, a lawyer — has to check the documents as a Spanish notary is not obliged by law to disclose all information. You need to be careful that there’s no mortgage on the property, that everything’s okay with the building permit so you’re not buying anything illegal, and that you're aware of any other costs and shared responsibilities, such as a pool or elevator in a housing community.
I have heard stories of accidents in Spain, and in Greece too. It is true that prices are very low; you can sometimes buy a three-bedroom house with a pool and a garden for EUR 200,000 in a rather nice location. In comparison, for example here in Belgium, it is complicated to find a 60sqm apartment for that price.
So properties in recovering markets can be cheap but there is some primary work that should be done before acquiring any property in any country.
What should you know before buying property in Europe?
Every country will have fiscal implications you need to check:
- what local taxes you have to pay
- if you subject to pay capital gains or if you can escape from it
- what happens to the buyer in the event in death
- whether or not you need to pay inheritance taxes
Likely your net returns on property investments will decrease in the coming years because it’s reasonable to assume that taxes, charges and costs will go up in many countries across Europe. It’s true that taxes are going up — the UK is charging among the highest — and that some mortgage relief measures are diminishing, for example in the Netherlands.
But I don’t think this should be a reason not to buy property; so far investors have not been discouraged to buy property in spite of higher taxes, even in the UK, where since 15 April they have had to pay capital gains tax. But it can bite into your return, and investors should know that in advance.
Still, the negative impact of the fiscal issues today are neutralised or offset by the very low cost of borrowing. This appears to be one of the main reasons why in many stable European countries housing prices have either stabilised or went up a great deal, like in Germany, England and a number of other markets.
Another difference to be aware of lies between continental Europe and Anglo-Saxon Europe, like the UK: if you have a problem in continental Europe where tenants are more protected, you need to be aware that if you go to court it can be a very lengthy process. For example, it’s not so easy in continental Europe to kick out a tenant if they stop paying rent, unlike in the US and to a lesser extent in the UK.
What types of properties should investors consider for better returns?
A major trend in the European housing marketing and abroad is that buyers increasingly prefer to buy smaller houses — they are not interested anymore in acquiring big villas, which are not only expensive to buy but also expensive to maintain. The elderly in particular are the ones with money but they don’t have the energy to maintain huge houses. Youngsters, on the other hand, don’t have the money but are also not willing to spend time on big houses. So what we see today is that the luxury segment has more vacancies and very big villas are mostly for sale.
Instead many elderly would like to sell their houses and reinvest in smaller luxurious apartments with a view of the sea or a river. They are willing to put a lot of money in a five-star apartment without too much work afterwards.
Even when youngsters don’t have enough money, parents are often willing to help them out. They don’t know what to do with their money because if they put it in the bank, they will hardly get any return because interest rates are around zero. So if parents want to help their children they might consider investing in smaller, more affordable housing for them. This is now key in our society.
This not only is a financial trend, but also a social one, and property developers and investors should consider houses and apartments of a middle size or smaller, that are energy efficient, which is obviously big business almost anywhere in the world. This ‘small trend’ will even accelerate in the coming years. Even in Dubai, which always strives to have the best, tallest and longest buildings, new apartments and houses are being built smaller.
What about buy-to-let investments?
This trend is accelerating in the past years as real estate is increasingly considered as an investment object. Even families are buying or financing a second home with the idea to look for a tenant afterwards.
If you do rent out a buy-to-let property, you might have a rental yield of say 3–4 percent net after charges. This is not too high as a return — even on the low side — but today everything is relative. If we compare this to a one percent yield on a long-term corporate bond, at least a buy-to-let property allows investors to potentially cash in on higher yields.
But you need to be careful, too, because a tenant can walk away or decide not to pay anymore — which can be problematic in continental Europe — so those rental streams are not necessarily secured forever. But if you buy the right house, in the right location, and you find a tenant with a good salary, then you can make a better return compared to bonds or other asset classes — and people today are doing just that.
I think that this trend will accelerate – unless interest rates were to rise suddenly – as even at BNP Paribas Fortis, we increasingly have cases where new loans are given to families to buy a second home.
Click to the top of our guide on buying a property in Europe.
Pol Robert Tansen, Head of Real Estate Investment Strategy / BNP Paribas Fortis Belgium / Expatica
Comment here on the article, or if you have a suggestion to improve this article, please click here.