Martynas Stankevicius. Will investors return to the rental market?
With sales of new apartments in Vilnius reaching a one-and-a-half-year high at the end of the summer, some market participants are also talking about the return of buy-to-rent investors or speculators. However, several years of calm in the housing and rental markets have introduced investors to alternatives - according to the Bank of Lithuania, the number of investors in other asset classes grew by 75% last year. Therefore, it will be interesting to see whether investors in flats for rent will return or stick to alternative instruments.
For several decades, investment flats for rent in Lithuania have been not only the most understandable but also the most profitable investment. "A few years ago, INVL Asset Management calculated that the average annual investment return on rental with capital appreciation between 1996 and 2022 was between 11% and 14%, much better than the historical average annual returns on shares, bonds or different funds.
However, the lion's share of these figures has always been accounted for by property appreciation, i.e. not only real rental returns but also property value growth. "Ober-Haus data for the last six months show an annual appreciation of 1-2.5% for apartments. Higher house price/value growth is unlikely in the near future due to the still unresolved geopolitical situation and the large supply of already built housing. It is clear that in recent decades, Lithuanian incomes and, consequently, house prices have been catching up with Europe, and with a really high level of development, there is less and less room for growth.
Simply put, those who caught the property appreciation train of the last decades have won, but it is unlikely to happen again soon. If an investment apartment is bought today, the real return on renting an apartment, at least in Vilnius - the largest market in Lithuania - is currently closer to 5-6%, after taking into account value gains, taxes, maintenance, but without taking into account time costs, downtime, and other hassles. Such returns are currently not far ahead of bank deposit rates.
It seems, therefore, that the growth in investors in other asset classes that started a few years ago was not only due to obvious external reasons - the war in Ukraine, the slowdown in the economy and sales - but also partly to mathematics - other investment vehicles have recently offered more liquid and profitable options.
The declining interest in investment housing is also indirectly illustrated by official statistics from the Bank of Lithuania (BoL). For example, according to LB data, the number of Lithuanian investors has increased by as much as 75%, the number of transactions has doubled, and the value of assets under management has increased by one third. Considering only transactions in accounts of supervised financial instruments, LB estimates that Lithuanians have invested EUR 1.2 billion in shares (up 6% since 2022), and almost EUR 1.5 billion more in bonds or funds. Investments in the latter asset classes, according to the Bank of Lithuania, have almost doubled in 2023.
The Lithuanian crowdfunding market continues to grow rapidly, reaching EUR 230 million or 43% growth last year, according to the data of LB. The majority of this segment consists of loans from residents for the development of real estate projects with mortgages. Residents were keen on crowdfunding for real estate development, attracted both by the fixed return of 8-12%, usually paid quarterly, and by the pledge of real estate as collateral in favour of investors.
By comparison, long-term investors in equity markets can realistically expect an average annual return of 8-10%. Investments in crowdfunding or corporate bonds offer similar, and often higher, returns, making them mathematically much more attractive than rental housing.
Looking at the most conservative instruments, there has also been an increase in the amount of money held by Lithuanians in fixed-term deposits, which, according to the LB, have risen from EUR 3.5 billion to EUR 7.4 billion in the last two years, a jump that may never have been seen before - probably due to the interest rates that have come back to zero after a decade-long break. But when deposit yields became close to those of an investment apartment, some investors simply opted for a simpler and more liquid asset class. And those who wanted to earn more turned to crowdfunding, bonds or the stock market.
Of course, a buoyant housing market is good news for many: first of all, it is a sign of recovering expectations. Real estate is a crucial sector for individual providers of a wide range of services and for the economy as a whole. The falling Euribor and interest rates are also good news: this means better access to housing and more funds available on the consumer market.
One can always understand investors who simply want an income-generating, physical investment such as property - they have been and they will remain regardless of the economics or the maths. However, investors with a little more careful calculation may not return to the rental market, but leave their capital in alternative arrangements that do not involve finding tenants, repairs or other worries.
It will therefore be interesting to see whether investors who have discovered new investment vehicles will return to "flats for rent". If they do not return at the previous volumes, this would further limit the future growth of house values.?
Martynas Stankevicius. Will investors return to the rental market?
With sales of new apartments in Vilnius reaching a one-and-a-half-year high at the end of the summer, some market participants are also talking about the return of buy-to-rent investors or speculators. However, several years of calm in the housing and rental markets have introduced investors to alternatives - according to the Bank of Lithuania, the number of investors in other asset classes grew by 75% last year. Therefore, it will be interesting to see whether investors in flats for rent will return or stick to alternative instruments.
For several decades, investment flats for rent in Lithuania have been not only the most understandable but also the most profitable investment. "A few years ago, INVL Asset Management calculated that the average annual investment return on rental with capital appreciation between 1996 and 2022 was between 11% and 14%, much better than the historical average annual returns on shares, bonds or different funds.
However, the lion's share of these figures has always been accounted for by property appreciation, i.e. not only real rental returns but also property value growth. "Ober-Haus data for the last six months show an annual appreciation of 1-2.5% for apartments. Higher house price/value growth is unlikely in the near future due to the still unresolved geopolitical situation and the large supply of already built housing. It is clear that in recent decades, Lithuanian incomes and, consequently, house prices have been catching up with Europe, and with a really high level of development, there is less and less room for growth.
Simply put, those who caught the property appreciation train of the last decades have won, but it is unlikely to happen again soon. If an investment apartment is bought today, the real return on renting an apartment, at least in Vilnius - the largest market in Lithuania - is currently closer to 5-6%, after taking into account value gains, taxes, maintenance, but without taking into account time costs, downtime, and other hassles. Such returns are currently not far ahead of bank deposit rates.
It seems, therefore, that the growth in investors in other asset classes that started a few years ago was not only due to obvious external reasons - the war in Ukraine, the slowdown in the economy and sales - but also partly to mathematics - other investment vehicles have recently offered more liquid and profitable options.
The declining interest in investment housing is also indirectly illustrated by official statistics from the Bank of Lithuania (BoL). For example, according to LB data, the number of Lithuanian investors has increased by as much as 75%, the number of transactions has doubled, and the value of assets under management has increased by one third. Considering only transactions in accounts of supervised financial instruments, LB estimates that Lithuanians have invested EUR 1.2 billion in shares (up 6% since 2022), and almost EUR 1.5 billion more in bonds or funds. Investments in the latter asset classes, according to the Bank of Lithuania, have almost doubled in 2023.
The Lithuanian crowdfunding market continues to grow rapidly, reaching EUR 230 million or 43% growth last year, according to the data of LB. The majority of this segment consists of loans from residents for the development of real estate projects with mortgages. Residents were keen on crowdfunding for real estate development, attracted both by the fixed return of 8-12%, usually paid quarterly, and by the pledge of real estate as collateral in favour of investors.
By comparison, long-term investors in equity markets can realistically expect an average annual return of 8-10%. Investments in crowdfunding or corporate bonds offer similar, and often higher, returns, making them mathematically much more attractive than rental housing.
Looking at the most conservative instruments, there has also been an increase in the amount of money held by Lithuanians in fixed-term deposits, which, according to the LB, have risen from EUR 3.5 billion to EUR 7.4 billion in the last two years, a jump that may never have been seen before - probably due to the interest rates that have come back to zero after a decade-long break. But when deposit yields became close to those of an investment apartment, some investors simply opted for a simpler and more liquid asset class. And those who wanted to earn more turned to crowdfunding, bonds or the stock market.
Of course, a buoyant housing market is good news for many: first of all, it is a sign of recovering expectations. Real estate is a crucial sector for individual providers of a wide range of services and for the economy as a whole. The falling Euribor and interest rates are also good news: this means better access to housing and more funds available on the consumer market.
One can always understand investors who simply want an income-generating, physical investment such as property - they have been and they will remain regardless of the economics or the maths. However, investors with a little more careful calculation may not return to the rental market, but leave their capital in alternative arrangements that do not involve finding tenants, repairs or other worries.
It will therefore be interesting to see whether investors who have discovered new investment vehicles will return to "flats for rent". If they do not return at the previous volumes, this would further limit the future growth of house values.?
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