Investing in Homes or Financial Assets, Pros and Cons of the Treading Brick Dilemma | Financial markets

The Spaniards love to invest in bomb-proof housing. The severe brick crisis that began in 2008 shattered the mantra that apartment prices would always rise, but did not dampen interest in investing savings in real estate. The stock market is perceived by ordinary citizens as a volatile and risky asset, even difficult to understand, despite the fact that long-term investment in stocks can provide returns higher than bricks. Spain is a country of homeowners, the result of decades in which purchasing a home was a family economic priority and an achievable goal. The current situation in the real estate market, where demand significantly exceeds supply and drives out the most vulnerable groups of the population, such as young people and immigrants, from the market, contributes to a constant increase in purchase prices, as well as rents. Money requires money, and despite rising prices, brick remains attractive as an investment. Also the stock market, which continuously accumulates highs in the case of the American one, while the Spanish one restores the levels of 2010. What asset should the savings be allocated to then? Is there a competitor in the financial market to the Spanish investor’s deep-rooted love for bricks?

The first prescription that experts give is diversification, and the second, if not the first, is that past returns do not guarantee future returns in either brick or mortar or financial assets such as the stock market or debt. The dilemma between one option or the other also mixes cultural and emotional factors. “There is a strong element of risk aversion, putting money into something tangible like a home, and the idea that housing can supplement retirement,” explains Raymond Torres, chief economic officer at Funcas. The data is undeniable: 72.1% of households own their home, and 46.8% of households also own real estate other than their main home, which mainly includes a second home or land and farms. “In Spain, financial assets represent approximately 26.3% of total household assets. The rest, 73.7%, are real estate assets,” explains Judith Montoriol, economist at CaixaBank Research.

Montoriol notes that, as the 2008 crisis showed, the concentration of household wealth in real estate can pose a risk in the event of price shocks. “Investing in a portfolio of financial assets can provide greater income diversification and greater long-term growth potential. In addition, lack of liquidity in real estate assets may limit the ability of households to respond to shocks,” he points out. However, investing in a primary residence reduces uncertainty about future rental costs and is usually a form of long-term savings commitment for households.

For those buying a second home in addition to their own home to rent out, the returns generated in recent years have been very attractive. As the Bank of Spain reported this week, annual rental returns – taking into account property value appreciation plus rental income – were 10.8% gross between 2015 and 2022, just the years of soaring brick prices since the bubble burst. In contrast, returns were negative between 2011 and 2014, with home value losses exceeding rental income. The harvest each year between 2015 and 2022 now far outstrips the annual growth over that period for both 10-year sovereign bonds (1.2%) and bank deposits (0.3%) or Ibex (including payment of dividends, 6.8). %). Thus, brick outperforms the financial assets most accessible to Spanish investors, a conclusion that experts explain should not be extrapolated to the present, given the current situation in the real estate market, as well as the profit potential that the environment represents. reduction in interest rates.

Gross annual rental returns topped 10% from 2015 to 2022, but experts believe they are much lower on a net basis.

Rental profitability has several layers that experts insist on distinguishing. A broader term, gross profitability, refers to the appreciation (or depreciation) in a home’s value plus rental income. But if we exclude the element of property appreciation, gross rental yield remains at 3.4% per year, also according to Bank of Spain data as of June. A figure comparable to 3.4% of ten-year bonds or 3% of deposits, and much lower than Ibex’s 14.1% ex-dividend. According to Jaime Zumalacarregui, managing partner of private banking at Atl Capital, “the net rental return, discounting costs and not taking into account the mortgage payment on the rental home, is between 4% and 6% due to the revaluation of the asset.” David Cano, CEO of AFI Inversiones Globales, adds that “net rental returns are not as high as they might seem. Taking into account taxes and expenses, it could be about 2.5%, if you rely only on rental income and not on the increase in property values.”

Zumalacarregui admits that “real estate is very similar to fixed income, although brick may be the winner.” Thus, a home investor is looking for security first and foremost. “Bank debt, such as contingent convertible bonds, may offer 6% or 7%, but have a different type of risk. This is not comparable to developing real estate in an area that has potential for improvement,” the expert adds. Zumalacarregui also notes that brick is a key element in the portfolio of private banking clients, although they are now moving away from looking at real estate more because of the price issue than because of the perception of regulatory risk or price controls. . “Without a doubt, the stock market is much more interesting than bricks,” he adds. Thanks to the multiplier effect of compound interest, whereby interest added to the initial capital adds more interest, “with an annual stock market return of 7%, the value of the portfolio doubles in 10 years. And if the annual return is 10%, the value of the portfolio will double in seven years,” he explains.

Anyone who entered the S&P at the 2009 lows will accumulate a profit of 760%.

But in the world of investing, whether in bricks or financial assets, nothing is linear or free of surprises. A brick burst in Spain more than ten years ago; The stock market entered the red in 2008, and 2022 brought the biggest losses in history for fixed income. The trace disappears as the perspective expands into the long term. As manager Schroeders admitted, “stocks have delivered returns above inflation for several historical periods, whether it be the last 5 years (about 12%) or 50 years (about 7%). Over longer periods, such as 20 or 50 years, bonds also provided higher returns than inflation. But the same does not happen over shorter historical periods, as bonds have been impacted by rising inflation and corresponding rising interest rates in recent years.

“No profits can compare to those accumulated by those who bought the S&P 500 at the 2009 lows after the crisis,” defends Ricardo Comin, Vontobel sales director at Iberia. The index has since been revalued by 760%. According to this expert, “the stock market has historically been unbeatable, except for those who invested shortly before the Lehman crisis,” although Comyn now touts the appeal of fixed income as an alternative to traditional investing. “Developed country investment grade debt can yield 4% or 5%, just getting the coupon is worth it,” he defends. Comyn also insists on two aspects that should not be overlooked when comparing investments in bricks with investments in financial assets. So the stock market or fixed income has daily liquidity compared to the months it might take to sell a home. “In addition, it is very important to comply with the deadlines required for investing in financial assets. With a fixed income, at least three years, and preferably five. And on the stock market for at least five years, it’s better if it’s seven,” he explains.

Amounts are also a determining element when choosing the direction of investment. The minimum amount of €1,000 required to purchase treasury bills has nothing to do with the cost of purchasing a house. “You don’t use leverage to invest in bonds, but you use leverage to invest in housing if it’s long-term,” says Joaquín López Chicheri, a partner at Abante real estate for whom debt has already absorbed some of the potential promised by rate cuts. has already been taken into account by the market and which highlights that for the wealthiest clientele and with the possibility of investing large assets, commercial premises and industrial warehouses dedicated to logistics are an even more profitable alternative than rental housing.

But the large imbalance between supply and demand for housing once again points to the attractiveness of investing in brick in the future. It’s no wonder that more than half of the houses bought in Spain are paid for in cash, without a mortgage. “Besides the fact that rental profitability has already increased significantly, there are still opportunities,” says Lopez Chicheri. Funcas’ Raymond Torres believes the property market may be approaching excessive purchase price levels, which could discourage buy-to-let properties. But “even though we are closer to the purchase price tipping point, that doesn’t mean rents will get cheaper.” “There is a constant shift in demand towards rentals,” he concludes.