by The most direct way to answer this question is to seek expert advice using, for example, a real estate agency and/or go through the main online property portals to get an idea of selling prices and rents that are charged in the area where the property is located.
All strategies are welcome to get the best possible deal. That is, resorting to a financial index that is widely used in the stock market to value companies.
For those who invest in shares, the concept of the price-earnings ratio (PER) — the ratio between the share price and earnings per share over the last 12 months — is not new: a company trading at a PER of 10 reveals that it had a profit of €1 for every 10 euros of the share. This means that if the company operates at the same rate for the next ten years, it will recover all the money invested after a decade. In the real estate market, the application of the PER has the same relationship. The only difference is the absence of real estate profits, which must be replaced by the accumulated value of the rents over a year.
So to calculate your home’s PER, you simply divide the price you would get when you sold it by the total of 12 months of rent if you chose to keep the home and rent it out. However, both in the stock market and in the real estate market, this indicator is only meaningful when compared to historical data.
Looking, for example, at the sessions of the main index of the New York Stock Exchange, the S&P 500, which gathers the 500 largest non-tech companies in the USA, it is possible to determine that the average PER of the S&P 500 is 20.3.
So any time the S&P 500 trades below this threshold, it will theoretically be cheap compared to its average value and therefore a good time to buy. And when you’re trading at a PER above that threshold, historical index data indicates that S&P 500 stocks will theoretically trade at prices above their average (and therefore a good time to sell).
In the case of the national real estate market, using data from the Confidencial Imobiliário, it can be seen, for example, that, currently, in Lisbon, real estate is “cheaper” than in the period between 2018 and 2022: according to ECO calculations, properties in the capital are trading at an average PER of 22.3 compared to an average PER of 24.2 over the previous four years. In theory, this means that it is not a good idea to sell a house in Lisbon right now.
“The Lisbon market is and will always be the most stable and liquid market,” says Ricardo Guimarães, CEO of Century 21 Portugal, stressing that “investors who invest in Lisbon for rent accept to lose out on rental profitability in order to bet on the stability of the valuation and the liquidity of the property.”
According to ECO’s calculations, a new apartment in Lisbon has a yield of 4.5% on the rental market, compared to an average yield of 5.6% in the capital’s regional municipalities.
In contrast to Lisbon is Porto and 18 other municipalities that currently “list” with a PER above the average PER of the previous four years. However, Ricardo Guimarães underlines that, in general, owners who do not need liquidity should not sell their homes, because, according to the leader of Century 21 Portugal, “it will be natural to see a clear transfer of the demand to purchase housing for rent’, depending on the economic environment that Portugal is currently experiencing.
Text included in the March 14 edition of Portfolio Perfect, ECO’s personal finance newsletter, which you can subscribe to via this link.
