The most conservative investment worldwide yields higher return than property

We share with you an article published in El Cronista newspaper where we have been consulted about the current situation of property rental in Argentina.

 

While 10-year bonds in USA yield more than 3%, the net rent of a property is 2.5%. In addition to this, maintenance costs of a vacant property entails $87,000 yearly.

Both real estate values and construction costs have achieved the highest figures in the last 40 years. Are we experiencing a consolidated market? or Is it an alert of a possible crisis in the sector? In most cases, the rental value is related to the salary and the price of the property.

 “We are experiencing quite an unusual situation: rental yield is too low for the landlord and, at the same time, the price is, many times, unaffordable for the tenant. The problem is not the landlord or the tenant but the high price of the property”, Mariano Capellino, CEO of INMSA, warns.

He provides an example by saying that the square meter for a brand new apartment in Caballito district is the same or even higher than the value of an apartment in Brickell, which is today being sold at u$s 3000; while the square meter of a second-hand apartment in Caballito (u$s 2,500) is almost doubling the u$s 1300 in traditional apartments for residential use in Miami.

He mentions Caballito district as an example but, in neighborhoods such as Belgrano, Palermo or Núñez, the comparison is even worse, because the cost per square meter for construction in Argentina is twice the cost in USA and Europe.

 “With devaluation, if the US dollar gets higher, there may be a reduction in real estate prices. Regarding construction projects, costs are set in Argentine pesos, based on this scenario, developers will admit lower prices for off-plan basis projects (measured in US dollars). And this will also have an impact on second-hand properties, so far overheated by UVA mortgage plans and which have already cooled down”, as confirmed by Damián Tabakman, president of the Argentine Association of Professors and Consultants on Real Estate.

Rental net return is currently undergoing minimum historic values, with a 2.5% rate annually, according to a report issued by Reporte Inmmobiliario every year. Also with a latent risk of maintaining a vacant apartment at $87,000 yearly, and which requires some paint coating before signing each new contract, while USA Treasury bonds, which yield 3% annually, do not require any maintenance at all. Also, this assumption made by Rerporte Inmobiliario includes the fact that during the rental period, the tenant must pay taxes such as ABL (lighting, sweeping and cleaning public spaces) and water services as well.  “The incredible fact is that property rental is lower than the yield of a USA Treasury bond, which is not a good indicator at all”, as warned by Cappellino.

Mariano Sardanás, CEO of FDI, agrees: “No doubt, the value being currently required for a property is unsustainable. I say the term “required” because it is very different from the amount at which the operation is actually accepted and closed. Last year, owners adjusted prices taking advantage of the tenants’ demand who were desperate to become owners through UVA loan systems. Prices rose at such a high level that the number of transactions were reduced to almost zero as the installment/income ratio of the potential buyers was not convenient unless they accepted to acquire a smaller property”, We ourselves have more than fifty apartments in stock which we are unable to sell, at least at the prices that real estate agents are requiring from clients. In any case, prices are being reduced by10% but still the market is not validating them. Here, the problem will involve thousands of owners who will face liquidity difficulties, either because they need to sell the property in order to use the money for a living or to invest in their companies or pay compensation and restructure the company within a more competitive economic scenario. The market is clearly starting to push down prices. Another matter to be considered is that the American 10-year bond is offering 3.1% yield. Almost 50% more than property rental operations and with the same tax reach” as pointed out by Sardanás.

It is estimated that less than 10% of the potential buyers have access to mortgage loans today. And with the current level of inflation, this number will be reduced. In contrast, in developed countries, more than 50% of people have access to bank financing facilities at approximately 5% annual rates, to be paid in 30 years.

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