Buy, repair, sell: how to make money on redevelopment in Europe
Rental rates for rental businesses in Europe have been falling for the past few years. According to a PwC study, Emerging Trends in Real Estate, in the eurozone, they dropped from an average of 6% in 2009 to less than 4% in 2017. Many investors have switched to redevelopment projects (they are also called value added projects), with which you can earn 10–20% per annum on invested capital.
The essence of such projects is that an investor or a group of investors acquire real estate in poor condition below market value, repair or rebuild the object and lease it or resell it to end customers at an elevated price.
According to the European Association of Investors in Unquoted Real Estate Funds (INREV), after the 2008 crisis, the share of investors willing to invest in the value-added strategy decreased from 59% to only 26%, but by 2017 it had again increased almost doubled to 49% .
In which segment to invest money
For value added strategies suitable property of any type. The sector associated with short-term rentals attracts more and more investors: according to the PwC survey, more than half of investors consider niche segments for investments in 2018, in the top five most popular hotels (28% of answers) and serviced apartments (17%).
The main reason why the demand for these types of real estate is growing is an increase in the flow of tourists. According to the World Tourism Organization (UNWTO), the number of tourist arrivals from abroad in the world in 2017 increased by 7% and reached 1.3 billion. UNWTO predicts growth in 2018 by another 4–5%. Most travelers in Europe: in 2017, the number of international tourist arrivals in the region amounted to 671 million – 8% more than in 2016.
According to forecasts of Euromonitor International, the number of international arrivals of tourists around the world will increase to 2.3 billion by 2030 Jacek Dylag / Unsplash
For those who want to make money in the segment of tourist housing and receive passive income, Tranio recommends investing money in serviced apartments for short-term rental to tourists. Why not in hotels? In most cases, the investor wants to buy a small hotel for 10-30 rooms, but at the same time does not plan to move and participate in the management. Then he will be confronted with the fact that, on the one hand, large hotel operators take control of hotels with a foundation of 100 rooms, on the other hand, hiring a manager will be too costly a solution for a mini-hotel. It makes sense to think about its attraction only if the hotel has more than 50 rooms.
Serviced apartments are intermediate between conventional rental housing and hotels. As a rule, these are studios or one-bedroom apartments, the area of which is 15–30% more than hotel rooms. The main differences of this type of housing from hotels are the availability of a kitchen and a limited set of services (for example, food is not always organized). The minimum budget for investment in apartments in Europe – 100 thousand euros. Such apartments are sold individually or in packages, and the management and all the concerns associated with tenants are usually taken over by the management company. For an investor, the average profitability of such a business is 5–7% per annum after deducting expenses and taxes — about two times higher than with a long-term lease.
According to Tranio experts, the most interesting opportunities for investors in redevelopment projects are offered by Greece. This is one of the last markets in Europe, where prices have not yet recovered from the crisis and there is a large growth potential: real estate costs about 40% less than the 2008 level. Tranio predicts an increase in the cost per square meter in the next 2-3 years for two reasons. First, Greece is experiencing a tourist boom: according to the Bank of Greece, the number of foreign tourists who meet the demand for short-term rent has increased from 15 million in 2009 to 30 million in 2017. Secondly, the Greek economy is beginning to recover: Greece’s GDP increased four quarters in a row in 2017, and the European Commission predicts economic growth in 2018 and 2019 by 2.5% per year.
Arthur Yeti / Unsplash
In Greece, Tranio offers to invest in its own project – the redevelopment of a 500 m² building located in the center of Athens on Codratu Street, two minutes from the metro station and half an hour walk from the Acropolis. The object will be divided into 7–11 apartments, which will be rented out to short-term tourists with the help of a professional management company. As a “bonus,” the investor and his family will receive a residence permit in Greece for the entire period of ownership of the object.
The cost of the building together with the cost of the purchase and redevelopment – 750 thousand euros. According to experts Tranio, in the next two years, the investor can expect a price increase of up to 50% of the purchase price. Such a high yield can be obtained only in 2018, while a square meter is cheap.