IS THE REAL ESTATE INVESTMENT REALLY PROFITABLE?

Is the real estate investment still profitable and what are the alternatives?

Why do Slovenians like to invest in real estate in physical form?

Public opinion in Slovenia is strongly inclined to invest in real estate as physical form, since the market for investment in various real estate funds (e.g. REIT) in Slovenia is underdeveloped. The reason is mainly psychological, because we like to demonstrate our status with ownership, strengthen our assets and, consequently, increase creditworthiness at credit institutions. Traditionally, property ownership is desirable, with more than 90 per cent of the population living in property ownership. Compared to developed European countries, where this proportion is around 50 per cent, this is an extremely high proportion, and in these countries real estate policy is in favour of renting and even promoting it.

And here we come to another dilemma: either buy a property or rent it out? There is certainly no unique answer, both of which have positive and negative consequences of decisions. Otherwise, the prevailing view is that buying is more economical as we acquire ownership, but with ownership comes the additional maintenance costs that fall off the lease. The disadvantage of renting, however, is the cost of rent and the feeling that we don’t have “our own roof over our heads” and further some flaws in the real estate law.

If we focus on investing in real estate for rent, what are the options and the situation in the property market?

If we first focus on the type of tenants, in the past period many landlords have ruled for short-term rentals through various platforms (Airbnb and Booking), while long-term rentals (students and families) have stagnated at the expense of this. The “Corona crisis” came in, and thus the decline in tourism, which again tilted the scales aside for long-term rents, but prices fell due to increased supply. At the same time, several properties for sale have come into the real estate market. In particular, the increased supply was made in commercial real estate, as companies were interrupted by rental contracts or selling redundant premises due to work from their employees’ home. There are also smaller pubs in shopping centres that are by no means viable in times of crisis.

  What are the current prices of flats and rents?

According to data from the Surveying and Mapping Authority of Slovenia, in the first half of 2020 the prices of second-hand dwellings in Slovenia averaged EUR 1,920 per square metre, pointing out that they are dwellings of average age 43 years and a usabel area of 55 square meters. On the basis of the same parameters, flats have reached a price of EUR 2,910 per square meter and are still increasing, so at the moment they reach a price of almost EUR 3,000 per square meter. According to the internet portal nepremičnine.net, monthly rents in Ljubljana reach the following values: studios EUR 490, one-bedroom flats EUR 560 and two-bedroom flats EUR 750.

What about the return on real estate in terms of investment opportunities?

Let’s focus on investing in real estate in the form of purchase and subsequent letting, which is the most appropriate form in the eyes of investors today. Let’s assume that in Ljubljana we have to deduct 175,000 EUR for a flat (not new construction) of 60 square meters and that we have to invest an additional 10,000 EUR (painting the walls, arranging the floors, buying part of the furniture) to be ready for rent. Then suppose we find a tenant and charge him EUR 750 monthly rent, which is EUR 9,000 per year.

In accordance with the Personal Income Tax Act, we must of course pay personal income tax on this amount, but we can reduce the tax base by 15% due to the standard costs of maintaining the property we rent out. In our case, this means EUR 1.350, the tax base is EUR 7.650 and consequently the tax (27.5%) is calculated in the amount of EUR 2.103,75.

In addition to rental tax, we have other costs, annual property insurance in the amount of 200 EUR, maintenance costs in the amount of 600 EUR per year, the cost of assessing compensation for the use of building land (NUSZ) in the amount of 100 EUR per year, which amounts to 900 EUR per year (all costs were taken into account in lump sums). Taking into account rental income and all costs and taxes, the annual earnings in our case amount to EUR 5996.25. And if we compare this amount with the invested one, it means a 3.24% annual return, or the investment is repaid to us within 31 years.

It should be emphasized that our case is based on the full annual occupancy of the property and that the investor fully invests his own funds, i.e. without foreign funding. On the other hand, we did not take into account the appreciation of real estate as a consequence of the growth of the market value of real estate, which in the last 13 years amounted to 1.5% per year in Slovenia, not taking into account the effects of inflation.

In the end, we can conclude that such investments do not, however, achieve the return that many expect, i.e. up to 10% at the annual level?

Flats for rent achieve an annual return of between 3 and 5% on average, and other types of real estate we have not even studied. There are always differences between expected and real returns; for whom the annual return of 3% is also satisfactory, especially compared to the fact that it is a relatively safe investment. However, in the end, I would like to point out another disadvantage, which concerns both investment in buying and selling as well as buying and leasing, namely the issue of liquidity. In addition to security, this is a key factor compared to profitability, and real estate investments are poorly liquid in the short term.

Depending on the situation in the real estate market and the financial condition of the investor, there is a possibility of a sale wit a loss, and there also may be problems with leasees or a few »dry« months of non leasing the property. There is no diversification of investment and the dependence on investment is significant. However, taking these facts into account, the investment can also achieve a negative return. With the increasingly developed alternative investment market, with the additional awareness that the covid-19 pandemic will be with us for some time, the feasibility of investing in individual real estate needs to be considered very seriously.

There are quite a few alternative investments on the market that offer risk diversification and, from the point of view of their conservative nature, also higher returns than real estate investments. Secondly, they allow for a quick opportunity to sell over the life of the investment, allowing investors to very realistically estimate their projected returns. Why not invest in consumer finance portfolios during times of mass consumption and easily accessible lending?

Matevž Raztočnik

Matevž Raztočnik

CEO pri Superos, upravljanje alternativnih investicijskih skladov, d.o.o.
Director SFM

Andrej Laznik

With flexible financial solutions according to the highest business and moral standards, as well as an agile and dynamic customer-centric approach, we want to raise the bar when setting new standards. We believe and constantly prove that our approach is superb and we are best-equipped for the challenges of the future.

Founder

Klemen Mlakar

In his varied career Klemen has led and successfully managed assets of big investors. He is an expert in setting strategies, designing risk processes, and leading companies to financial stability. Klemen has seen numerous complex restructurings to successful ends, and led some of the most important merger projects in the region.

Founder

Boštjan Klinec

Boštjan is an expert with more than 20 years of international experience in insurance, banking, asset management, and leading investment funds. He has successfully led multiple projects focused on opening new markets, leading new companies abroad, and, once there, expanding them into local success stories.

Director Superos Fund Management

Andrej Laznik

In his diverse and extensive career, Andrej has more than 30 years of experience in leading large companies, establishing optimal organisationsand processes after company mergers, directing optimisation processes and streamlining expenses, all with the goal of cementing financial and business success.

Head of Back Office

Tanja Močnik

Tanja has over 20 years of experience at ALTA Invest and Poteza d.o.o.. Her expertise ranges from managing all the company‘s internal processes to leading its sales network. She has successfully run and integrated an enviable number of developmental projects.

Sales Director

Mateja Zavadlal

Throughout her more than 20-year career, Mateja has acquired extensive experience in both the public and private sectors in Slovenia and abroad. She built her career in management by leading mergers, directing financial and organisational restructurings, and leading companies in a variety of fields. Mateja is focused on establishing a company’s culture, streamlining business processes and building strong, successful teams.

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