Property market, prices towards normalization/ Is it worth investing?!

2023-09-09 09:18:00, Aktualitet CNA

Real estate remains the main alternative for financial investments in the Albanian market. After a halt at the end of the first decade of the 2000s, the sector revived again, starting especially after 2017.

The price growth cycle appears to have peaked between the second half of 2021 and the first half of 2022. But early data shows that the surge in house price growth was contained in the second half of last year.

The Bank of Albania reports that, despite the stability of demand and the increase in construction costs, real estate agents have reported lower sales prices compared to the previous 6 months.

According to the Fischer housing price index, which is calculated on a 6-month basis, the average price of housing sold in the second 6 months of 2022 has resulted in an increase of 16.6% compared to the same period a year ago, but has decreased by 9.1% compared to the first 6 months of the year.

In particular for Tirana, the price index maintained its annual growth rates, with 13.9%, but on a 6-month basis, it suffered a deeper decline, with 11.4% less.

According to the Bank of Albania, this development suggests that the increase in prices may have entered a phase of normalization. It is also noted that in the second 6-month period, the weight of transactions where the purchase price of the property for the completed sales was lower than the price requested by the seller has increased.

Despite the price restraint, the agents' general assessment of the general market situation was more positive compared to the previous period.

The number of new apartments registered by agents has remained almost unchanged compared to the previous period, while the number of unsold properties, both for apartments and commercial buildings, has continued to decline for several six months in a row.

The average time to sell apartments in the country fell to 10 months from 10.8 months six months ago, as a result of the significant decrease in the time to sell apartments in other areas. For Tirana, the subjects surveyed reported an average sales time of 10.7 months, and this value was about one month more than six months ago.

For the coastal area, the sales time has increased from 6 to 7.3 months. The time to sell properties in other areas was reported to be significantly lower, from 13.1 to 9.6 months.

Financing through bank credit has continued to figure in a good part of property sales. According to the agents, as in the previous period, more than half (56%) of the residential and commercial properties sold by them were purchased with bank loans. Of these, in 80% of cases, the loan covered up to 60% of the value.

The loan for the purchase of housing again set a new historical record last year, but the growth rates slowed down significantly compared to 2021. Bank of Albania data show that the new loan for the purchase of housing reached 46 billion ALL, or about 396 million euros. New housing loans increased by 16% compared to 2021.

Although annual growth was again high, it was significantly reduced compared to the record 50% growth recorded in 2021. The value of the active or outstanding home loan portfolio at the end of 2022 reached almost ALL 167 billion, with annual growth of 14%.

Although the figures for the rental prices have not been detailed, according to the agents they have increased during the period. The overall rental demand is reported to be higher than the demand in the first 6 months of 2022. Information on demand and rental prices comes mainly from agents operating in the capital area.

Expectations for the future appear positive, despite the uncertainties associated with the situation. Agents have positive expectations for the performance of the market in the territory where they operate for the short-term future and in the longer-term period of up to two years.

The number of properties expected to be registered for sale during the ongoing period is expected to have no inherent fluctuations, given that the responses of agents show a balanced result. On the other hand, agents also expect increases in real estate prices for residential and commercial properties.

With a normal economic logic, property prices should go towards stabilization, in conditions where interest rates have increased (and will probably increase further in the short term), while economic growth rates appear to be slower.

The property market in Albania is also affected by specific factors, such as the channeling of large sums of money from illegal activities into this market.

Real control over the source of income that finances the construction and purchase of properties in Albania is very weak and this sector is perceived as one of the most effective ways to launder money. The increase in prices has made this sector even more attractive to invest dirty money.

Non-resident buyers have also played an increasing role in recent years. According to agents, this includes several different categories of buyers. Perhaps more important is that of those who have invested in properties on the coast, taking into account the fact that in general, in coastal areas, Albania has offered more competitive prices, even with neighboring countries.

Others are foreign citizens, or Albanian immigrants, who have seen the purchase of a property in Albania as a good investment, seeing the increase in prices. Another category is the foreigners who come for permanent residence in Albania, due to the climate and the lower cost of living.

According to data from the Bank of Albania, last year, foreign investments in real estate in Albania reached the value of 291 million euros, increasing by 52% compared to the same period of the previous year. Real estate brought in more than 21% of the total value of Foreign Direct Investment for the past year.

However, high price growth and the cycle of rising interest rates is making properties less affordable for the middle class, which also makes up the broadest buyer base in this market.

For this reason, experts think that, at a minimum, prices will stabilize at current levels, but perhaps in certain areas, where the supply has increased a lot in recent years, there may also be a downward correction.

Jonian Antoni, General Director of the Century 21 Albania network, even says that the increase in property prices has been restrained since the last 3 months of last year.

“Property prices have remained almost unchanged since October 2022. This is because global construction costs have fallen and as a result there has been no need for builders to increase prices. However, fortunately, the demand for property is still alive and very high," he says.

Properties still offer the highest returns

If we were to make a comparison for the returns offered by each of the current investment alternatives in the Albanian market, with the available data, real estate is currently the one that provides the greatest benefits.

The Bank of Albania estimates that last year, housing prices increased by 16.6%. To these can be added the annual profit from renting a property, which according to agents is approximately at the level of 5% per year.

If we add the benefit from the increase in the market value of the property and the rental income, the investment in real estate has resulted in a gross annual return on investment of 21.6%. Apartments, along with furniture and equipment, have depreciation over time, which requires periodic expenses for renovation and maintenance.

However, even deducting depreciation and maintenance costs, the return on investment in a residence in recent years has been significantly higher compared to financial instruments.

Among the financial instruments, the highest return is offered by the publicly offered bond of the financial institution NOA, at the rate of 8%. For the same maturity (5-year), Albanian government bonds offer a return of 4.7%, deposits in Lek a maximum of 3.6% and those in Euros, 2.5%.

Deposits offer lower returns, but it should always be borne in mind that they also have the lowest degree of risk. Bank deposits are guaranteed by law up to the amount of 2.5 million lek, which guarantees the depositor that he will get the money back, even if the bank goes bankrupt.

On the other hand, the further strengthening of banking supervision parameters and the raising of the rescue fund (Emergency Intervention Fund) makes the sector more protected and reduces the likelihood that a bank will go bankrupt.

Among pension funds, the highest return is at the level of 3.84%, while for investment funds, based on the latest data, 4.73%.

If we rely on the progress of the last years, it seems that investment in real estate has been more profitable in relation to the financial instruments offered by the Albanian market.

However, financial investments have different characteristics and offer much more security, especially in terms of liquidity. Deposits can be withdrawn at any time the individual needs, while debt instruments can also be sold to financial institutions.

Deposit interest rates and bond coupons are benefits guaranteed by the terms of the contract with the borrower.

On the other hand, properties are a less liquid investment, while the performance of their market is more difficult to predict, even in a medium-term time horizon./ Monitor Magazine