The overheated domestic real estate sector has started to cool down, but you wouldn’t be able to conclude that by looking at the peppery price per square meter of an average apartment in Serbia. Although in the second quarter the year-on-year price increase slowed down to “only” 11.9 percent, the number of concluded contracts dropped dramatically – by 21.3 percent compared to the same quarter last year.
The most pronounced decline in real estate turnover was recorded in the capital city: in the period from January to March, there were 16.6 percent fewer sales of apartments in Belgrade compared to the same months last year, and from April to June, the trend was even more dramatic, so the year-on-year a drop of almost 25 percent.
In a situation where the number of apartments purchased on credit has more than halved (the annual number of contracts concluded with the help of the bank is 54 percent lower), it can be said that the harsher monetary policy of the world’s central banks (that is, the increase in interest rates) has begun to threaten the buyers of investment properties as well.
The risk of losing principal, when interest rates are rising and citizens’ savings are still threatened by high inflation, is not the only reason for the contraction of the real estate market, because currently around four-fifths of all apartments are bought for cash. To this we can add the slowdown of economic activities.
Although the purchase of rental apartments is considered a risk-free investment, and rental income is a stable passive source of income that requires little involvement, in a period of economic instability this is not always the case either.
That’s right, before the last statistical report, in June there was a drop in apartment rents of almost eight percent in almost all parts of Belgrade.
THREE MAIN TYPES OF INVESTMENT: APARTMENTS, DEPOSITS AND GOLD
Nenad Gujaničić, the chief broker of the investment company Momentum Securities, states that the largest number of citizens who invest and who want to preserve the value of their money still do so through real estate, bank savings, or investment gold.
He states that the citizens who invest the most money invest in real estate, but only those who can afford it, because with the large increase in the price of square meters and interest rates for buying an apartment, this type of investment is available only to a “narrow circle of savers”.
“I believe that the real estate market is relatively tough, in the sense that the drop in demand does not cause an immediate drop in prices.” First, there is a drop in traffic, and as a rule, prices fall after that. If you look at the previous cycle, which happened after the World Economic Crisis, the decline in the stock market happened in 2008, the recovery followed in the spring of 2009, and the real estate market in Serbia only entered the crisis in 2009. I’m not saying that we should expect the same scenario, inflation also spoils the picture a little, but it is inevitable that there will be a correction in the real estate market, which will be slower precisely because of its specificities,” said Gujaničić in an interview.
According to him, in a situation when the market cools down, one of two things must happen: either rents will rise and catch up with the rise in real estate prices, or real estate prices will fall, so rents will be lower or the same.
“I believe that this second scenario is more certain, because it is not normal to buy an apartment on the real estate market and earn two to 2.5 percent gross from the rent.” Something is wrong here – either real estate prices have to fall or rents have to rise in order to reach a yield of four or five percent (annually).
Savings in the bank
Among domestic investors, bank deposits are in second place. Since inflation is higher than the interest that banks offer on savings, they actually lose the value of their investment. According to him, the reason is the low financial literacy of the population, but also a large number of small depositors who keep money in the bank for security reasons.
“If we have information that domestic banks have between 13 and 14 billion euros in deposits, that would mean that per capita we have around 2,000 euros in savings in banks. But, (the largest part of) that savings is concentrated on a small number of citizens, medial savings are extremely small… The economic illogic (keeping savings in the bank when inflation is higher than interest) is a consequence of the inertness of our citizens. For example, Eurobonds that are traded on the international market have a yield of close to six percent, savings in the bank are twice as low, and they pay taxes on those savings. “Such economic illogicality could not happen in some developed country”, believes Gujaničić.
It’s time for gold
The third alternative for investing in a period of inflation and increasingly strict monetary policy is gold, adds Gujaničić.
“Gold is generally a safe haven for citizens, including a large number of those who do not trust the financial system… On the other hand, gold has a centuries-old tradition, especially among older citizens who do not believe in financial instruments,” said Gujaničić.
According to him, the small number of investment opportunities is not the only excuse for sitting in the bank or in the square, because there are other alternatives available to everyone, but the main problem is, again, the low level of knowledge.
“Older fellow citizens are cut off from alternatives, while among the younger population, especially in the IT sector, the level of investment culture is significantly higher, because some of them also received shares of the international corporations they work for as bonuses.” There are no restrictions for our citizens, they can comfortably invest (in financial products and shares) like citizens of any other country, only the costs are slightly higher through domestic stock brokers,” adds Gujaničić.
According to him, there is no exact data on how many people invest in foreign financial markets, but he states that it is “not a mass phenomenon”.
“Rather, we will talk about thousands, rather than tens of thousands of people.” If we recall the stock market boom in Serbia before the outbreak of the Swedish economic crisis, then 20,000 to 30,000 people were active on the domestic stock market. The current engagement in the world markets is not even close to that, but it is expanding,” concluded Gujaničić.
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