To invest or not to invest in real estate: that’s the question!

Herman Van der Loos - Senior Equity Analyst

Europeans, especially the Belgians, love real estate. The saying goes: Belgians are born with a brick in the stomach; this is true for most Belgians when looking at the numbers of ownership in our country. So, buying a house or an apartment is, for most of you, the first goal. But investment in real estate

goes beyond a house or an apartment

; you can invest in warehouses, shops, data centers, etc. Also,

securitized paper real estate

offers many possibilities for investing. We will look at the situation of residential real estate in Belgium, Europe, and worldwide. And we will share great ideas on how to start investing in real estate. Lets’ discover the ins-and-outs of real estate and how that can work for you as an investment.

A broader look on real estate in Belgium, Europe, and the world

Prices for real estate are booming around the world. Sure, in certain regions, we see the opposite or lower prices, but in general and especially Western Europe, Japan, and the USA, the trend is unmistakable. Also, in Europe, the same evolution plays with quite some differences between regions and cities. The game of supply and demand plays at full when it comes to prices for real estate. Some countries in Europe have more substantial population growth; in other countries, the property is scarce. In Paris, prices are the highest ever, in Rome they are going down, and in Prague, the prices climbed more than 22 %. Belgium stays with its prices in the middle, compared to other European countries. Of course, prices can go up, but the differences lie in prices in each European country. To what degree can individuals buy property in a European country? In Belgium or Portugal, it takes four years on average to buy a house. In Italy, for example, on average, six years, following gross salary earned. Not only the growth in population but also interest rates influence the real estate prices. Interest rates are low, the possibilities to loan money for real estate are better than ever in Belgium and other European countries. Due to low-interest rates, one feels richer; individuals can offer a higher price; more money is available for down payments on mortgage loans. And more factors influence the prices: buying power, GDP and urbanization, young people move into the cities, and the older generation move towards the outskirts of the town. Finally, the government support for sustainable living and the taxes that also apply significantly impact the buying and selling of real estate. But that differs for every country involved.

Is real estate an unstable investment?

That’s the question! Yes, it is a stable investment, but never forget that real estate prices can go down. On many occasions in history, this was the case. We can mention here real estate speculation, the outbreak of the gulf war, etc. The external factors can put a brake on the prices. Let’s remember the subprime mortgages and the financial crisis in 2008, which had more influence in the United States due to the lack of social protection and more people investing in stocks. Or let’s look at Covid-19; this influences prices for properties with a garden, a direct result of the pandemic crisis. We can call the year 2020 the ‘year of the garden’. It makes all the difference in the prices of apartments and houses. No garden or terrace, no higher prices, they will stay all-time low. Is nowadays a crash of real estate possible? The opinions on this matter are divided. Some say that property yields i.e. the equation rent and value are out of balance; others say that the market is stable. Indeed, real estate is not anymore the bargain of the month. The mid-segment prices are roaring, and they are too high. The other remaining factors that influence the real estate market are prices, credit, too much optimism, oversupply, and not enough end-users. All these factors have an impact on the stability of your real estate investment.

Paper real estate

You can invest in physical property, but, as mentioned before, there are more possibilities. You can also invest in securitized i.e. ‘paper’ real estate via the stock market. The problem with physical real estate is that you can’t diversify; the options to buy, e.g., a shopping center are limited (unless you have piles of money on the side). The solution to this problem is the securitization of real estate. Belgium is a pioneer in this matter. Already many years ago, we introduced this way of investing via real estate certificates, and nowadays, the Regulated Real Estate Company (RREC) with Real Estate Investment Trust (REIT) status is making headlines with returns of 3 to 5 %. How does it work? Via a Special Purpose Vehicle (SPV) projects in real estate development start. Instead of buying a house, the SPV buys a house, receives rent, and you get paid a dividend. Clever, no? The lack of company tax makes it possible to have a good return without too much tax leakage. Even better is that the SPV buys ten houses. If there’s a problem with one of the houses, that’s only 10% of the patrimony. On top of this, you have no worries about costs or maintenance, etc. This way, the dividend, and the return can be higher. And if the choice is made for investing via debt (via the bank), the returns can even rise to 5%. Diversification can happen on the side of buying real estate and your side, as a shareholder. You can purchase shares in elderly homes, investment property, etc. This way, you enjoy competitive returns, and you diversify your investments. It opens the door to a whole new way of investing in real estate. Nowadays, the REIT structure (Real Estate Investment Trust) is applicable around Europe; most countries have introduced legislation on this matter, like no company tax, obliged stock market listing, etc. Will you consider investing in paper real estate? To invest or not to invest in real estate, that’s the question!

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