Why Investing In Real Estate in Europe a Good Idea
Ashish Saraff, CEO, Founder, Aretha Capital What is the real estate investment scenario in India? Real estate investments have historically been a preferred investment for centuries and became more popular in the 20th century with introduction of mortgage for retail buyers. Investors across the risk appetite spectrum are attracted to this investment class because of their low-risk nature and high-reward possibility. The aspect of being a physical asset which can be touched and seen, provides a sense of safety to those who invest their hard-earned money. Serial investors and windfall gainers often park their surplus funds in real estate by purchasing multiple properties in and around their city. Major Indian cities like Lucknow, Kolkata, Delhi, and Mumbai have performed well over the past decade according to the House Price Index, with an IRR of 16.1%, 13.3%, 12.2%, and 11.2%, respectively. A significant chunk of these returns from owning homes was earned between June 2010 and June 2015, which were subsequently subdued at around the annual 5% mark until 2020. Despite steady sectoral growth, like every developing economy, the Indian subcontinent has also been subject to various bouts of inflation over the decade. Inflationary trends across industries have also yielded a significant impact on the performance of the real estate sector. What are the reasons for Indian investors diversifying in overseas real estate? The current global, socio-economic situation has inspired Indian investors to diversify to overseas real estate, especially in Europe. These investors have recognised that their money is devaluating faster when invested entirely in the domestic market because of the depreciating value of the ? and inflation. Investors are potentially foreseeing that the “real return” on their Indian investments might be in the low single digits this decade. While Indian real estate industry has advanced almost at par with other G-20 countries, it is now important more than ever before, for investors to look beyond their residence geography especially if one already has two or more properties in their usual place of residence. This has been quite common in the West, where affluent investors diversify their real estate holdings in multiple countries. While some enjoy them as holiday or retirement homes, others buy to derisk from all their investments being in one country. Why Europe? After the financial crisis of 2008 which shook the global real estate markets, the European real estate market has steadily recovered and witnessed many years of strong growth. Since 2016, the average yearly increase in residential property prices in the EU has been around the 4% mark, outperforming both GDP growth and wage growth. Country-wise statistics suggest that Portugal, Greece, Cyprus and Spain have shown steady rental yields and annual appreciation around the 3-4% mark while inflation remains at sub 1% across these markets, justifying positive real returns. For example, Lisbon witnessed a healthy growth in price per square meter for the past five years, with prices increasing by ~42% since 2017. Gross residential yields have been equally encouraging at around the 7-8% mark in the outskirts and 5-6% mark in the city centre. Lisbon’s luxury markets have increased by 98% in price, which outperforms a number of European cities’ growth and second only to Berlin. The most expensive average price per square meter in Lisbon is in the Santo António district, which is €11,200. The city’s new inventory levels are also low at around 7400 units as at the beginning of this year which points to the possibility of prices remaining stable in absence of excess supply. Similarly, Athens rental yields have been stable at around the 4% mark for apartments larger than 120 sq.m. and just under the 6% mark for smaller apartments where the average size is 75 sq.m. While house prices fell drastically after the 2008 crisis, prices have seemed to stabilise over the past 5 years and recorded positive growth since 2017. In 2020, the average price increase was closer to the 6% mark. Western Athens saw highest price rise closer to the 8% mark while Northern Athens averaged 5.5%. Most Greek islands also witnessed 3-6% price rise between 2017 and now. Such overseas markets attract investors from India, China, Russia and the Middle East because they not only provide a natural hedge against the currency and market risk, but also give residence rights to the investor’s family. What are benefits for Indian investors? Over the past decade, ? has depreciated against major currencies including US$, Euros (€) and Sterling Pounds(£). This trend is likely to continue in the current decade as India chases high growth, further creating an opportunity for Indian investors to park their surplus funds in an appreciating currency yielding a higher return when liquidating their European investment property should the need arise. In an investment climate affected by artificially low interest rates and tricky geopolitical events that drastically affect stock markets and equity returns, investing in European real estate can prove to be a good alternative for Indians. Residence rights accompanying such real estate investments in Europe is the icing on the cake can, allowing investors long-term flexibility and mobility in the European Union. Countries like Greece, Portugal and Spain offer the so-called Golden Visa to foreign investors with a clear path to European citizenship as well. While the IRR in real estate would be similar in most major markets, investors must consider future needs when investing, given the changing framework of the world. Along with monetary benefits, availing residency rights in the EU via investments offers investors a chance of better education for their children, advanced healthcare, excellent infrastructure, more economic prospects, and a safe place to retire. These investments help diversify a part of an investor’s wealth held in their local currency and provide a sustainable passive income, which is positive net of inflation.
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