Investing in real estate: returns and risks
In large cities, a two-room apartment of 65 square meters yields on average around 5% gross per annum. In Italy, the city where the performance is highest is confirmed Verona (6.1%) followed by Genoa (6%)
The unknown factor of the increase in the costs of raw materials and energy is being felt especially on new buildings and this is affecting building development plans
Two years after the pandemic outbreak, other threats face the markets. What are the impacts on the real estate sector?
"The effects of the war on the real estate sector are not yet evident," says Fabiana Megliola, head of the study office at Tecnocasa Group, who explains that at this time, their agencies have not provided different indications than in the past. "Rising inflation is a stimulus, however, to real estate purchases given that bricks and mortar have always protected against the loss of purchasing power of money," Megliola continues, according to whom the trend that has seen savings pouring into housing in recent months could strengthen in the coming months as well.
It is difficult to predict when the geopolitical environment may return to normal and when it is likely to be a "new normal." "What seems reasonable to expect, at least in the short term, is a growing tension on commodities, and consequently an increase in the inflationary push, compared to which the brick remains a haven asset historically able to protect asset values (subject to physical loss in a world war scenario, which we all avert)," comments Albo Bisioli, partner of the law and tax firm Biscozzi, Nobili, Piazza. He adds that "gold and diamonds are viable alternatives, but riskier in case of subsequent normalization of the economy: one risks buying badly and selling worse, unless one is willing to preserve and pass on to the next generation."
"Certainly, in a scenario, more or less likely, in which real estate is not damaged (the reference goes to war, ed.), the brick remains one of the absolute safe-haven assets, right after the gold bar and other commodities par excellence," explains Maurizio Fraschini, partner of the law and tax firm Plusiders, who then, however, urges caution. "In this context, the quality of the property becomes even more important. If there was also a post-pandemic interest in properties for redevelopment in more peripheral areas, now you have to buy quality properties to be defensive. In a somewhat longer-term view, large cities (and Milan) provide greater stability of asset value growth. However, if it is true," Fraschini continues, "that real estate is a defensive asset in a phase of high inflation (as there may be in the coming months) because it allows you to avoid a devaluation of purchasing power. One could reach the paradox (which one hopes will remain a school hypothesis) that the value of money is so debased by inflation that it is even difficult to obtain a fair price from the sale of the property or to find a buyer capable of paying that "virtual" price. This is considering the limited possibility of resorting to bank financing (at least for residential properties in the lower-middle price range). Kind of like it was in Weimar Germany where houses virtually had a high value, but then had no market and no one had the means to buy those properties."
There is no question that the war may represent an unexpected cold shower on our country's economic vitality and projections for further expansion. "The reaction to the new scenario can only be one of temporary wait-and-see, both on the part of households and banking institutions, whose orientation may become progressively more selective," says Nomisma, which estimates that maintaining the extraordinary transactional levels reached at the end of 2021 (+34% of residential sales in 2021 compared to the year before). A few weeks ago it seemed the most likely scenario, but now it appears to be an optimistic prospect. "Although the residential sector has recently demonstrated extraordinary resilience, the second shock in less than two years, unaccompanied by an adequate deployment of additional financial resources and a markedly accommodative monetary policy, could lead to a new downsizing," add the Bologna-based firm's experts.
More optimistic are other traders.
"The unknowns are many. Real estate has held up well to the impact of the pandemic. The desire to buy homes, at the moment, remains buoyant, as also witnessed by the Inland Revenue Agency's data on 2021 purchases and sales," comments Megliola, who then adds, "An increase in interest rates is on the horizon, but, in general, it should not be such as to discourage purchases, especially those related to the main home."
Also, for Nicoletta Papucci, marketing manager MutuiOnline.it, "at the moment, investing in bricks and mortar continues to be the best choice for Italians, even considering the unpredictable fluctuations of the stock market in such uncertain times: think that since the beginning of the year, the Ftse Mib index has lost (as of March 19, ed.) 12.65 percent. On the other hand, it is undeniable that there has been an increase in reference rates, particularly the Euribor, which has returned to 2019 levels; the effective fixed rate, however, is significantly below 2% (1.56% the average of 20- and 30-year mortgages disbursed on MutuiOnline as of February 2022), making it still very affordable.
In the coming months, we expect that as the spread between the fixed and variable rates increases, the latter option will become more attractive and attractive to consumers again. Consider that in 2014, 56 percent of applications were for variable-rate mortgages, while in early 2022, they are just above 11 percent: this number will surely go up in the coming months. In addition, banking institutions may begin to offer more "complex" products (for example, with mixed rates or variable rates with caps) that will expand consumer choices while keeping real estate a desirable market."
The unknown of rising commodity and energy costs is being felt, especially in new construction, affecting housing development plans. "It will have to be understood how these costs will affect the market and how the demand of those looking for new homes will respond, demand that after the covid has increased," illustrates Megliola, who then adds that "it could slow down investors who buy to renovate the property then and resell it," but that "at the moment, however, there are no impacts on those who buy to put up income."
How much, then, could bricks and mortar yield?
"In big cities, a two-room apartment of 65 square meters yields around 5 percent gross per year. In Italy, the city where the yield is highest is Verona (6.1%) followed by Genoa (6%)," comments Megliola, who sees high interest from investors for bricks and mortar, although in the first part of 2021, there was a slight drop in purchases for investment, compared to the same period in 2020 (in fact, it went from 16.8% to 16.3%).
The net percentage return on a property depends on the rent with the property's purchase value; hence the highest returns are recorded, almost always, in suburban areas where prices are lower. "Beyond the much-dreaded reform of the cadastre (from 2026), Italian real estate taxation (compared, for example, to that of France) is, in any case, moderate, thanks to the 21 percent dry coupon, which replaces, in addition to Irpef, the registration tax, and stamp duty. Decisive then becomes the (correct) purchase price, to which to relate the net rent," specifies Bisioli, who adds that "in a war scenario, moreover, an increase in demand for real estate is foreseeable, with consequent price growth and compression, at equal rents, of the net percentage yield. Indeed," he says real estate "becomes a safe haven asset, rather than a speculative asset.
In a more complex economy, however, the landlord's risk of having problems with the tenant is also greater. As is well known, in the event of nonpayment of monthly rent payments, the tenant cannot immediately regain full possession of the property. "In case of delinquency, the landlord must undertake an eviction procedure, the timing of which varies depending on the municipality involved. In Milan, for example, the timeframe (to return to full availability of the premises) is around 6-8 months (unless there is a pandemic upsurge)," explains Bisioli, who then concludes by pointing out that overdue and unreceived rents are not subject to taxation, "provided that their non-receipt provides an eviction notice for delinquency or an injunction for payment."