Wednesday, 2 January 2013

The status of real estate investment in Portugal

Many of you look at countries under bailout, such as Portugal, and think that now is the time to make real estate investment in these countries. The real interjection to this idea is both a yes and a no. I have been for the past years interested in buying something myself. But with this being a lifelong investment and with a computer science background I wanted to be as pragmatic as possible. So I started my market research, where I ended up studying macroeconomics and financial markets as well. I would now like to share the results and conclusions with anyone who may find them useful.

To properly understand the Portuguese real estate, we should take into consideration that buying a house or apartment has always been the favourite investment of the general population. It is also important to know that unlike other western European countries, Portugal has a very high amount of emigrants. Lots of Portuguese live outside of the country where they work in higher return jobs piling up money for when they eventually return.

Traditionally the emigration scenario leads to “power buyers” who are able to buy one or more homes without requiring credit. These return after they retire or if the macroeconomic environment improves. It is well known that Portugal is currently in a deep recession, which encourages the opposite! Every month thousands of Portuguese leave the country, many of them highly skilled and trained workers. The first negative variable rests here, if they would stay in Portugal, these workers would drive economic growth and would have the best salaries the country has to offer, making them the ideal home buyers.

Another two interesting factors are the severe aging of Portuguese population during a burst of a real estate bubble. The active workers which could invest in homes are either already paying one or having their salaries shrunk to a point where they hardly have any available disposable income. While their counterparts, the young ones, are either unemployed, paid poorly or leaving the country. If this is associated to the housing market burst it can be easily seen that the aggregate supply highly exceeds the aggregate demand. Leading to thousands of unsold homes all over the country, which leads to higher competition and declining prices.

It is not possible to talk about real estate investment without also analysing the renting opportunities of owning a home. And to properly do this we should first look at risk factors and investment yield. A low risk investment normally has a full return on investment of around 20 years which is represented by an averaged 4% annual yield on the total value of the initial investment. At the moment a home being rented has the same or lower yield after you consider extra costs, such has maintenance, real estate tax and other expenses. The risk also increases if you consider the dangers of renting to a bad person, which might severely damage your property.

People normally say “so what? You can still sell your home for more money than you bought it”. This is sometimes true, but this also applies to all other investments you do: stock, debt, precious metals, you name it. If the aggregate demand doesn’t increase it is more likely you will sell it for the same price you bought it than to score a huge profit out of your sale.

On the other hand if you wish to buy an extra home for vacations in one of Portugal great beaches, the power to negotiate is on the side of those with money. And there are very good opportunities with people getting desperate to sell properties in order to get some cash or free themselves from debt. Banks doing massive auctions and even the state is selling properties with a success rate of only 12%.

All this will lead to a decline (i'm not taking inflation into account here) in real estate prices during the next years until it stabilizes. So there is still a long road until the prices stop dropping, and with an average selling time frame of 14 months you can find really good businesses if you are patient. But don’t expect to quickly monetize your investment if you are buying solely to get the yield and profit from it.

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