It’s time to make that property abroad pay its way. We report on research showing that yields are highest in cities
Perceived wisdom suggests that when buying a property abroad you need to choose between buying for investment or for holiday fun. However, research by Savills estate agents, suggests otherwise. Majorca, it seems, can tick both boxes.
Yolande Barnes, the head of Savills world research, looked at the factors that determine the financial success of second-home ownership and found that those that do best are in cities such as Madrid, Barcelona and Venice.
In these cities landlords can take advantage of the elongated tourist season to maximise their rental yield or the strong resident rental markets. Traditional holiday hotspots such as Tuscany, the Côte d’Azur and the Algarve, on the other hand, might make pleasant getaways but are unlikely to produce much by way of rental yield.
Having said that, Ms Barnes’s research, which looks at factors such as the size of the market for holiday lets, competition from hotels and other holiday-home owners, plus the rents that might be achieved in relation to the property’s price, found that Majorca came out as the top place to invest.
Prime property on the Balearic island (where Savills does not sell property) is relatively affordable by luxury-market standards, with a two-bedroom apartment costing about €1.46 million (£1.25 million). Meanwhile, local hotel prices are mid-range, costing about £169 a night, for two people, in a four-star hotel.
“The combination of relatively low property prices and medium-value accommodation costs means there is potential for high rental yields,” explains Ms Barnes. “There is a huge potential market because so many people go there so you have a solid demand base. There are few holiday lets because it is mainly a hotel-based location so you will have little competition.” All of which adds up to a sound investment decision.
City options with good potential include Madrid, Venice and Barcelona. In Venice relatively low property prices combined with high hotel prices mean there is potential for homeowners to earn high rental yields, although there is some competition from other rental properties.
Ms Barnes says: “We haven’t gone as far as to predict how fashionable and sought-after real estate will be in each of the prime second-home markets around Europe, but we cover most of the major factors that will influence the cash returns and commercial success of second-home acquisition. Our ranking is based on the overall combination of these factors and how favourable they are to owners looking for rental returns and long-term capital appreciation.”
At the bottom of the ranking is the Algarve, where luxury property is very expensive — a two-bedroom apartment costs €5.42 million — and four-star hotel accommodation is relatively reasonable at £186 a night. This, combined with a fairly small potential market and lots of competing holiday homes, depletes the potential for rental yields.
“The locations with the biggest holiday-let markets are Marbella, Majorca, the Algarve and the Côte d’Azur, so owning a second home in these places means you are in an established location for holiday rentals. The downside is competition from other owners,” says Ms Barnes.
The place with the lowest number of hotels and other accommodation that will compete with your holiday let is Gibraltar — however, it receives a relatively low number of overnight tourists. The availability of holiday lets compared with hotels is lowest in Venice and Madrid, implying that rarity might lend your holiday home additional value.
In Ibiza reasonable property prices and high hotel costs should entice people to rental accommodation but, as Savills notes, it is sixth in the rankings because there is a lot of competition from other holiday-home owners.
In Montenegro prime property prices are lowest, but competing hotel prices are also quite low and there are already lots of rental properties on the market, so it is ranked fifth.
“It is no accident that some of the most fashionable and popular prime locations in Europe, such as the Algarve and the Côte d’Azur, are gathered towards the bottom of our table. These are locations of passion, where owners will buy because they love the properties and the lifestyle. For second-home owners in these locations, it is not the rental yield, occupancy levels and income returns with which they are concerned, but rather what they themselves will get out of the property: experiences, relaxation, family times, wellbeing.
“It is perhaps the less well-established places, and some urban locations, that may provide the greatest opportunities for generating additional income from second-home ownership.
“Capital growth will depend on how demand for these locations and their capacity for tourism grows. One advantage of cities over resorts is that there are two potential markets for a second home when it is sold: one is from other second-home owners, and the other is from domestic residents. The strength of local economies, as well as visitor popularity, will help to determine this future value,” Ms Barnes says.