THE BANKER OF REAL ESTATE: HOW TO ACHIEVE DOUBLE-DIGIT RETURNS

BANK, the most representative news group of the Argentine financial market interviewed Mario Capellino, appearing on the cover of the magazine in its July edition, proving once again the prestige gained by INMSA as a reference company in real estate investments.

Opportunities in real estate in Spain from USD 600 per square meter, with mortgage loans at 2% annual rate. Rental returns exceeding a net income of 7%, while in Argentine it is 1% or 2% being optimistic. It is necessary to analyze which country has gone through a crisis in order to seek the cycle of recovery of the price.

– Is Argentina a suitable market for this business?

– Not at the moment. It was a suitable market after the crisis of 2001 for a period of 7 years. And it was a long period because the prices of the different assets behaved differently. And we took advantage of both cycles. But we shouldn´t place the blame on Argentina.
Actually, this is a global business. It is necessary to analyze which country has gone through a crisis in order to seek the cycle for the recovery of the price. For instance, today one of our three markets are some parts of Florida where we are selling properties at 200 thousand US dollars, which we had bought for about USD 50,000 in 2013. During 5 years, we rented such properties earning 10% net income annually. This is possible because the value of rentals in countries with solid currencies remain stable, but profitability rises as its value has decreased one third of its historic price.

– You have also been one of the pioneers in Detroit
– That´s right. It is an example of another market where we are operating today. After the bankruptcy faced by the city, many people moved to other areas of the USA. But when large investors started to buy properties downtown a couple of years ago, a new immigration process took place thus pushing prices up only in class A assets because large investment funds saw the opportunity. Nowadays the price of these assets has already reached the same value or even higher values than before the crisis. But this is not the case in middle-class neighborhoods surrounding the downtown area whose values are still very low. With jobs recovery, there is a strong rental demand in B/C type houses which we had acquired at only 200 US dollars per square meter, thus achieving a net rental income of more than 12% annually. Only now are workers, who had faced the crisis, recovering the access to credits, therefore, those houses will be revaluated. We estimate than in four years these houses which we have acquired and repaired for a total amount of 40,000 US dollars will recover their value and we´ll be able to sell them at 120,000 US dollars. If you make conservative projections the total income projected is at least 18% yearly, as it was the case of B/C class houses in Florida. For this reason, we have offices in Detroit. We have been analyzing the market for 4 years and only 2 years ago we began doing business. In this aspect, we are similar to the stock market: research is fundamental and networking even more.

– How do you properly invest in the real estate sector?

– Most investors believe that when they acquire a property they are already investing. But this is not the case. In general, only one variable is considered: the benefit provided by the rental income. Today, at global level, rental income can reach an average gross income of 6% annually and 3% net amount, even though in Argentina today the net income is under 2%. Actually, the true real estate investment is a totally different thing. It depends on 3 variables. First, it is necessary to purchase a property at approximately 20% to 30% under market value, considering the 10% costs involved in sales operations. These discounts can be obtained in distressed markets, through a sophisticated approach enabling to buy real estate portfolios from banks which need to sell off the assets and from auctions. The second key variable is the accelerated annual rate of a real estate asset, i.e., discounting inflation, which is practically zero. This is why property is considered a safe investment. Now, those investing professionally, get appreciations higher than 10% annually because they seek markets which have undergone profound crises and assets with strong correction. In general, when a market falls 50% there is some 80% – 100% increase margin to recover their historic value and, it has been statistically proved that it will take place within a period of 4-7 years, depending on the type and class of asset involved, this may generate an annual actual rate of more than 2 digits. And the third variable is the maximization of the rental income. When you acquire a property quite under its real value, e.g. at 50% under its historic value in a developed market where rentals remain steady, the rental income tend to double.

–What level of income are we talking about?

–Being conservative, with discounts in purchases, rental income and appreciations, if a professional method is used it is possible to achieve an annual net income of 15%, without leverage, compared to 4.5% provided by the traditional model.

–What other markets are considered attractive today?

– Today the great market for investments is Spain. Unlike USA, where the value of properties reached rock bottom 3 years after the financial crisis, in Spain, it took 8 years. only by the end of 2016 it hit rock bottom. Today, class-A neighborhoods have already recovered their value and they are 10% to 15% above their value prior to the crisis 9 years ago. But in certain neighborhoods of Madrid, in the peripheral areas or important cities such as Malaga or Valencia, just to mention some example, you can buy properties at 600 dollars per square meter, less than half their value before the crisis and with half the cost of replacement, i.e. a unique opportunity. The market is recovering; for instance, in the last year Valencia rose 17%. The mortgage loan rates are 2% annually and the rental income is more than 7% net, while in Argentina it is scarcely reaching 1% or 2% being very optimistic.

– INMSA participates as an Asset Manager in an investment fund formed by Spanish real estate assets, is that correct?

– Yes, our Spanish association is the Asset Manager of Real Capital Funds, a firm listed in the stock exchange of Vienna with Spanish residential assets seeking to take advantage of this opportunity. We have been in Spain for 5 years analyzing the market and 3 years operating, as we understood that the conditions of the cycle were in place to obtain extraordinary benefits with low risks for our investors. As I always say, this is not “location” but “timing” business. If today you buy in Salamanca neighborhood, you will not do great business. Instead, if you buy in the outskirts of Madrid, in places such as Getafe, Leganes, etc., you can be successful. Someone in a meeting with financial institutions said that we are cycle hunters. I don´t like to be a hunter, but we search and deeply analyze markets in crisis where we can enter into during the recovery phase of the cycle and where there is potential for revaluation. But I want to stress the fact that we do not operate in any place. Surely there must be business in Venezuela, some in Africa, but the institutional risk is very high and we do not expose our investors to this type of risks.

–And how do you see Argentina?

–We hope we´ll be able to recommend Argentina in the future. We expect price verification, the development of a strong mortgage loan system and transparency in the operations so, like in other countries, we can know exactly the value of a property.

– Where do you envisage opportunities for the future?

– Even though Spain and Detroit still have a long way ahead, we are already analyzing Italy and Puerto Rico which can be interesting markets. But today we still recommend Spain. If it concentrates less than 2% of investments in Real Estate globally and if the largest investment fund has 25% of its assets there, it means that the opportunity is huge. This is also proved by the fact that this market has grown more than China and USA in terms of investments in the sector. But, as I am Argentine, I hope we’ll be able to analyze our market soon. We have done good business in Argentina for our investors starting in 2003 until 2010. First with premium property, and then looking for opportunities especially in the Province of Buenos Aires and the interior of the country. In those years we grasped 7 years of opportunity. We bought properties when values had reached their lowest point and were starting a revaluation process; and we sold them when values were rising and reaching a level of steadiness. First we operated with one type of asset and then with another. The characteristic of the real estate market is that the phases of its cycle are different depending on the type of asset involved. Types A, the most expensive ones, such as the following neighborhoods in Buenos Aires: Puerto Madero, Recoleta, Palermo, the assets in the best locations tend to have a lower loss of value during a crisis and they recover rapidly. For this reason, it is necessary to be clever and enter at the right moment and exit as soon as you they recover properly. Class B or C assets, distant from the city and in the interior of the country, lose their value for a longer period of time and drop more drastically. Due to this strong decline their recovery takes longer, compared to class A assets. Here, it is necessary to be patient and wait for the lowest value and understand the signs of recovery so that it is possible to buy and then sell the property once the price has returned to normal.

–Is it similar to stock exchange operations: buy low, sell high strategy?

Yes and no. First, there is a big difference. In the real estate market there is low volatility, prices are more steady but, when a crisis takes place, they are strongly impacted.
That is the opportunity moment. In general, every market offers an opportunity window of 4-7 seven years according to the type of asset involved, where it is possible to gain income of more than 15% in US dollars annually and with low risk if managed professionally.
Another difference is the fact that while the value of stock is the same for everybody, real estate assets’ prices are not. As we have developed some skills and capacity of investment, we buy properties with 20/30% under the market value because we operate in auctions, buy from bank portfolios or specific situations where sellers need to sell off. After that, property is refurbished and it is sold or, otherwise rented until its historic value is recovered and that is exactly the right moment for us to sell.

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Source: Bank Magazine