Returns from investments, properties come down from the "throne"

2024-08-31 12:44:00, Ekonomi CNA

Returns from investments, properties come down from the "throne"

Illustrative photo

By 2022, the available data suggested that real estate could be the most profitable investment option, in terms of the return it offered. But the curb on rising prices seems to have changed things.

The Bank of Albania estimates that last year, housing prices increased by 3.2%.

To these can be added the annual profit from renting a property, which according to agents is estimated at approximately 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 would result in an annual gross return on investment of just over 8%.

It should also be taken into account that properties, mainly apartments, also have maintenance and depreciation costs for equipment and furniture, which requires periodic expenses for renovation and maintenance.

Among financial instruments, higher returns, according to the latest data, can be provided through investment funds in shares or investment in bonds with a private offer of commercial companies, mainly financial institutions.

The WVP Global investment fund in the middle of this year was offering a return on investment of around 18.5%. This is currently the highest return offered by a financial instrument from licensed institutions in Albania.

But, it should be considered that these instruments have a relatively high degree of risk. The stock market, where the highest-returning mutual fund quotas are invested, is inherently volatile, although over the long term, the stock portfolios created by mutual funds have shown consistent and satisfactory returns.

On the other hand, corporate bonds also have a potentially high risk either because of the classification as subordinated debt, or because those issuers offering the highest returns are mainly engaged in consumer microfinance, where the credit risk for the issuer is higher.

Specifically, the highest return among the instruments issued this year is offered by the private offer bond of the Kredo Finance financial institution, at 13%. For the same maturity (5-year), Albanian government bonds offer a return of 4.9%, deposits in Lek a maximum of 4% and those in Euros, 2.7%.

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 5.38%, but more than a real investment, the pension fund is considered as a savings for old age.

If we go by the available data, it seems that real estate investment has been dethroned as the most profitable investment.

This is normal and expected, because the rapid increase in property prices cannot continue indefinitely.

The most profitable are those who bought a property at the beginning of the price growth curve, while when the upward slope of this curve seems to be approaching the peak, the expectations for a short-term and medium-term profit are lower.

However, on a long-term investment horizon, properties can still be an interesting alternative, because real estate market cycles are difficult to predict.

If we refer to the housing price index of the Bank of Albania, in the decade 2013-2023, real estate prices in Albania have increased by about 110%.

Today, Albania is facing a negative demographic trend. According to INSTAT, between the two Censuses 2011-2023, the population has shrunk by 17%.

This trend has yet to have major effects on the larger real estate markets.

The demand in the large urban centers continues to be supported by the internal displacement of the population, but also by the tourist boom, which has increased the demand for short-term rentals in Tirana and the coast.

On the other hand, financial investments this year offer relatively high returns and have advantages compared to real estate, 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.

Properties are a less liquid investment, while their market performance is more difficult to predict, even in a medium-term time horizon. /Monitor