Investing in real estate for private investors
Real-estate prices in Belgium are on the rise. In 2020, despite the Covid-19 crisis, we recorded an increase of 5.7 percent. Real estate therefore seems a very profitable investment. But is that set to change? And how great is the risk that property prices will fall in the short or long term? Let’s ask Frank Vranken, investment strategist at Puilaetco Private Bank, Mark Delboo, lawyer specialising in wealth & assets at Delboo Advocaten, and Kristof Vanfleteren, CEO of ION.
Frank and Mark, what is your opinion on private investors who want to invest in real estate?
Frank: “As an investment strategist, I believe that real estate is a must in any asset portfolio, whether physical or listed on the stock exchange.”
Mark: “Many of our clients have considerable assets and are therefore looking for the best and most interesting way to invest from a taxation point of view. Physical real estate is preferred by people who have a - sometimes unjustified - fear of the stock exchange, but who are also prepared to make an effort to maintain and rent it out properly. Others prefer to take the stock exchange route.”
Kristof, at ION you offer investment real estate. Is real estate also suitable for investors who have less or no affinity with the stock exchange?
Kristof: “There is a big difference between physical real estate and listed real estate. On the stock exchange you mainly find commercial property, such as offices or student rooms, and that can provide significant diversification compared to physical real estate. We strongly believe in the potential of real estate in city centres because land is scarce there, which ensures good rental yields. However, there are opportunities elsewhere too. Covid-19 has shown, for example, that young families are once again looking for homes with gardens on the outskirts of cities. Another motivating factor is the sustainability and quality of the product, for example. Older properties often pose sustainability problems. We therefore advise our clients to invest in new buildings.”
There is a variety of real-estate investments on offer, from student rooms to assisted living flats and even real estate abroad. Frank, which type do you prefer?
Frank: “We were just talking about student rooms, which can definitely be an interesting option, although you should consider that the regulations for this type of property are becoming stricter. This often leads to extra costs and you have to be sure that the tenant will pay up. Of course, the management of such a room can be outsourced, but that lowers your returns. Investing in assisted living flats is also a possibility, but in certain areas there has been a sudden increase in the number of such properties so, unfortunately, that does not always work out that well.”
Kristof, in your experience, what should be taken into account when investing in assisted living flats?
Kristof: “With this type of real estate, it is really important to take a number of factors into account: choose a good operator, opt for an assisted living facility near a residential care centre and take a critical look at the location. That is where the difference lies between a product of good quality and one of inferior quality. Of course, you can also find many listed companies in that sector. For large portfolios, we always advise our clients to diversify. Physical real estate requires your direct presence, because you have control over it and you determine the rent yourself. If you invest on the stock exchange, then you are dependent on external factors and that is precisely why diversification is essential for us.”
Frank: “Real estate abroad, on the other hand, is a typical emotionally driven purchase that you make for your own pleasure. Large rental yields are out of the question there and since taxation differs from one country to the next, things can get very complicated. Always take the net yield into account; sometimes the gross yield is manipulated, which may lead to disappointment.”
Clearly, there are many factors involved in real estate. Sometimes it is about control, other times it is about emotion. Mark, can you illustrate this further?
Mark: “Another example is investing in agricultural land. In the last ten to fifteen years, people with a capital of 50 or 100 million have invested enormously in agricultural land. That is about the most conservative investment you can think of, but those agricultural lands have tripled in price in ten years, which translates in enormous added value.”
The key question, of course, is whether property prices will continue to rise. What are ION’s expectations in this view?
Kristof: “The expectations must be correct. For a residential property, you can expect a real return between two and four percent, depending on a number of factors. I see a number of drivers that could cause real estate to increase in value permanently. Firstly, building plots are scarce and will become increasingly scarce. Secondly, regulations are making construction more expensive, which has an impact on the final purchase price. And thirdly, there is the demographic evolution, with different household compositions driving the demand for different types of homes. We believe that returns from residential property will remain high because over time you get both rental returns and capital gains.
Interest rates are low at the moment, so this is an ideal time to invest, but don’t forget that a good follow-up is important too. After five years, as a private investor, you have passed the capital gains tax threshold and then you have to re-assess whether to keep the property or not. Real estate should be part of an active investment policy, but here too you can call on expert advice. At ION, we support major investors on a large scale but we can also assist private investors on a smaller scale.”
Frank, do you have any tips on how best to deal with the costs associated with buying physical property?
Frank: “If you pay 10 percent in registration fees, you should in principle already have 10 percent in added value on your real estate. In recent years, real-estate prices have risen tremendously, but I am not sure that interest rates will still be at -0.5% in five years’ time, for example. So, there are a number of factors we cannot predict, such as interest rates, fiscal registration fees and, last but not least, inflation.”
We are in the future and we are looking to the future. Where are the remaining question marks in terms of real-estate investments?
Mark: “There are currently rumours that the government could significantly increase the tax on rental yields, which would put a lot of pressure on the rental market and the real-estate market. However, I do not see this happening soon because many private individuals also own real estate or rent out one or more houses to supplement their income. If a political party were to take such a decision, it would likely affect its chances in the elections, so that is a very important factor to consider.”
Kristof: “Personally, I don't think taxes will be raised anytime soon. After all, the construction industry is an important pillar of our Belgian economy and therefore a very sensitive topic.”
Frank, can you briefly share which groups of people real-estate investments are most interesting for?
Frank: “We tell our clients that you have to take age into account. For example, someone who is 80 years old should not put all his assets in shares because if the stock market crashes, this will have a major impact on their assets. Young people in their twenties and thirties are not very keen on buying a house at the moment. For people in their fifties or sixties, real-estate investments can represent 20 to 30 per cent of their portfolio, precisely because the interest rates are so low.”
We have already learned a lot of interesting facts. Is there anything else that you would like to add?
Kristof: “Purchase real estate from a reliable producer/supplier. In our market, there are many people who sell dreams but do not take quality, service and after-sales care very seriously. Real estate is part of an investment portfolio, so make sure you buy from a trusted party.”
Mark: “I would definitely put some of my assets in real estate, both physical and listed. But of course you need to have the required assets to start off, and you need to make sure you buy a quality product, so you don’t end up having to deal with courts or lawyers, and can still sleep soundly at night.”
Of course we have all heard those dramatic stories, but there are certainly success stories too. If you make a well-informed decision, and you are aware of the risks, you can definitely head for success. Thank you, Frank Vranken, Mark Delboo and Kristof Vanfleteren.