Investing in houses or Btp? The criteria for choosing well

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Considering current market prices and yields, is it better to buy houses or invest in BTPs? The strengths of real estate compared to government bonds.

In January 2023, the coupon of the 10-year Btp was set at 4.2% gross (net of taxes and purchase commissions is around 3.8%)

For the purchase of a residential apartment to rent, a lot depends on the location, but on average there is a gross yield of 5% which, after taxes (“cedolare secca”), fluctuates around 3-4% per year

The build to rent has a yield of around 4% in Milan and Rome, while it performs less in other areas

In this historical period, investment in Btp has returned to be much more profitable than in pre-pandemic years. We come from three years, from mid-2019 to the first quarter of 2022, in which the average yield on the 10-year Btp hovered around 1.1 percent gross, while some asset classes in the real estate market recorded all-time highs, with logistics, for example, reaching 7-8 percent gross returns in 2020 and 2021. But now, what pays off? The answer comes from Diego Vitello, a research office analyst at Gabetti Group, who explains that the Italian real estate market offers a diverse range of opportunities, depending on the different asset classes of which it is composed.

Vitello, given government bond yields, at their highest since 2014, should an investor buy Btp or houses?

Now the landscape has changed, and the performance of yields is evolving in light of the current restrictive monetary policy of the ECB committed to curbing inflation. However, there is a fundamental difference in comparing Btp yields with those of real estate. The 10-year Btp has a single coupon issued monthly by the Mef. In January 2023, for example, the coupon of the 10-year Btp was set at 4.2 percent gross, which after taxes and purchase fees, is around 3.8 percent. The investor, with respect to the amount invested to purchase the government bonds, will thus have a monthly return of 3.8 percent of the accrued interest, while they will be reimbursed for the amount invested in the purchase of the Btp, net of the interest already paid monthly over the 10-year period when the bond matures.

In contrast, the range of returns that the real estate sector can offer is much more varied as many asset classes it consists of (residential, office, retail, hotel, logistics, and industrial). For each of these asset classes, moreover, the dynamics affecting yield determination are many and depend on several factors. First and foremost, location; a real estate product performs differently depending on the vocation or development plan that a given area has given itself, guiding and shaping potential demand. Build-to-rent, whose investment volumes have grown enormously since 2021, yields around 4 percent in Milan and Rome, while it performs less well in other territories. Remaining on the most classic of Italian real estate investment, which is the purchase of a residential apartment to put to income, again, it depends a lot on the location, but on average, there is a gross return of 5 percent that, net of the dry coupon, fluctuates around 3-4 percent annually.

In light of the data highlighted, net property returns do not justify investment in this sector. What, however, are the strengths of real estate?

In this historical period, investment in real estate shows two opportunities that emerge from some inherent weaknesses in Italian real estate and cities in general.

A first opportunity comes from the outdated condition of much of Italy's real estate stock, of which about 50 percent of residential real estate is in class F and G. If it is true that one of the strengths of real estate investment lies in increasing the value of the property thus guaranteeing a capital gain, the redevelopment of this stock - also in light of the recently proposed revision of the EU Directive on energy performance - represents the driver that more than others allows a real estate revaluation operation. Patrigest, a Gabetti Group valuation and advisory company, has estimated an increase in market value ranging from 3-5 percent for each jump in energy class achieved through redevelopment. To give an example, the redevelopment of a building worth 200,000 euros that has gone from an E class to a C class sees a real estate revaluation of around 15 percent or 30,000 euros more than the starting value. The opportunity before us is therefore enormous both in general terms (of impact on GDP, tax revenue for public finances, CO2 reduction) and in market terms for us as operators.

On the other hand, a second opportunity is the lag many Italian cities show in their infrastructure level, often linked to decades of need for urban-economic vision or resources to put it in place. A delay translates into a market opportunity for investors who decide to bet on those cities that have decided to start new urban projects, find the resources to implement them and experiment with a new narrative of themselves through a targeted territorial marketing operation. An investment in these cities, precisely in the planning and design phase, can guarantee large margins of return and real estate revaluation once the project sees grounding. Compared to investing in the bond market, which, while offering obvious investment opportunities on the one hand, allows little margin in the revaluation of units upon redemption, real estate investment is much more flexible and profitable.

The performance of the Italian real estate market varies from sector to sector and city to city, what are the areas to focus on?

As we were saying before, in addition to the cities that traditionally provide good investment guarantees (Milan and Rome first and foremost and, in recent years, also the Bologna area), it is essential to focus on secondary cities that are equipping themselves with a concrete development plan for the future.

In Genoa, for example, there are several projects insisting at the moment that have obtained financial coverage, thanks in part to the Pnrr but not only (Terzo Valico, Gronda, Nodo Ferroviario, the regeneration of the Waterfront di Levante, the Diga Foranea, among others), which will transform and make the entire Genoa area more attractive and connected. As Gabetti Group, we have estimated that this massive infrastructure process will impact residential prices, estimated to rise by around 30 percent over the next ten years.

Turin, too, is trying to figure out what economic model to aspire to after a century in which it played the role of a Fiat-related motor town. After two decades of urban transformation at the turn of the 1990s and 2000s, thanks in part to the 2006 Olympic event, the city is engaged in some significant projects that may change the face of the town once again. Among them is the second subway line that will cross the city from northwest to southeast, which is characterized by numerous brownfields as a legacy of the industrial period. The realization of this infrastructure and the regeneration of brownfields will give vibrancy to the market with returns ranging from 6-9 percent.

On the other hand, Bari and Palermo are two southern Italian cities betting heavily on their tourism revitalization. Here, the yields we estimate for properties to be rented as a short-rent range around 6 percent for the civil category and around 3 to 4 percent for the luxury category.

A hot topic today is green homes: is it better to buy newly built apartments or to renovate?

It depends a lot on the type of investment one intends to make, the location, the income capabilities, and the possibilities of access to credit.

In general, a new construction, given its advanced technology and energy features, is, by definition, a forward-looking property built according to the standards and trends of the moment. In this sense, new constructions, in addition to achieving the highest performing energy classes (A1, A2, A3, A4), which means low consumption levels and high levels of comfort, are equipped with the infrastructure that will characterize the living of tomorrow. Think of the provision of home automation systems or the electric car charging station inside the boxes: these are amenities that perhaps the potential buyer will not use today, or at least not 100%, but he knows for sure that they will configure tomorrow's living. In this sense, for an investment to be amortized in the long run, new construction guarantees greater property appreciation than the property to be renovated. The property to be renovated only sometimes achieves a highly performing energy class because it depends so much on the starting class. Upgrading a G or F class building is unlikely to achieve a B or A class post-upgrading. That said, an investment of purchase and redevelopment guarantees an immediate capital gain equal to the value we mentioned earlier if the thought of in short to medium term.

In redevelopment, moreover, the role of bank credit for renovation will be central. Many lending institutions are expanding their product offerings of green mortgages and loans precisely because an energy-upgraded property manages to give more guarantees, both at the bank appraisal stage and in future property revaluation, also in light of the possible evolution of EU regulations on energy performance.

In a purchase and sale, a key role is played by the valuation of the property. What are the steps for a correct valuation of a property?

The correct valuation of a property is a very complex activity, framed on dynamics independent of each other but that altogether contribute to determining value. The analysis of the steps that will have to be taken into account starts with the location (region, municipality, neighborhood) for a comparative valuation and the reading of the context around the property to be valued. The possible presence of real estate developments or infrastructure projects is decisive in estimating the future growth of property values in the surroundings.

Then it is necessary to get into the merits of the intrinsic characteristics of the property, so sizing, maintenance status of the building body, exposure, and floor with possible presence or absence of an elevator are vital determinants that turn into valuation coefficients. In recent years, the energy performance of the property has also become of fundamental importance in the analysis of the characteristics, not so much because of the compulsory energy certification (Ape) at the time of purchase and sale, but precisely because buyers' awareness of this type of issue has increased. Once the location, context, and features are analyzed, one is able to understand what the catchment area of the property may be, thus, the potential target audience. These are the necessary steps to properly evaluate a residential property.

On the other hand, the value depends on its yield for commercial properties. The steps mentioned above will then need to be complemented by analyzing the cash flow from leasing the property.
Director of and editor-in-chief of the magazine. A professional journalist, she holds a law degree from the University of Turin. She has worked at MF, Bloomberg Investments, and Finanza&Mercati. She has contributed to Affari&Finanza (Repubblica) and Advisor.


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