As the European Union Economy recovers to pre-pandemic levels, real estate leaders predict strong growth for 2022. It may be the right time for offshore investors to buy into the European property market.

But where is the best place to buy real estate on the continent?

Spain remains one of the top European destinations for foreign property buyers. Knight Frank predicts the country will be the fifth largest investment destination in the Europe, Middle East, and Africa (EMEA) regions for 2022.  

Meanwhile, Portugal’s highly-developed property market enjoys a considerable presence of offshore investors. The country’s real estate sector shows continued recovery with an overall price increase of 13.8% in 2021.

Belgium’s housing market is another attractive option due to its stability and affordability. The prices of industrial and residential spaces are low compared to neighboring countries, with values forecast to rise by 4% in 2022.

Which of these three countries offers the highest return on investment (ROI) for long-term, short-term, and commercial real estate? Should taxes, purchasing fees, and exchange rates affect where you invest your money?

Read on for insights into these questions and more to help you make the best investment choices. 

Long-Term Real Estate

We’ve calculated the yearly ROI of purchasing a €500,000 residential property in Spain, Portugal, and Belgium. The reflected assets are in prominent areas of each country’s capital. We used the average rent of the suburb to calculate returns and included purchase costs and yearly expenses.

All calculations exclude insurance premiums, operating expenses, and upkeep costs. Other excluded costs like mortgage down payments, loan interest and repayments, and loan closing costs may also affect ROI.

56m2 Apartment in Madrid, Spain

€500,000 could get you a refurbished 56m2 apartment on one of the most coveted streets in Recoletos, Madrid. The approximate purchase costs, as seen in table 1.1, are €45,500. This brings your total investment to around €545,500.

Table 1.2 shows you could earn an estimated €1,500 a month in rent. Non-resident foreigners pay about 24% of rent received as income tax along with an annual 0.7% property tax. As such, annual returns amount to around €10,180.

That’s a yearly ROI of approximately 1.9%.

78m2 Refurbished Apartment in Lisbon, Portugal

With €500,000, you can buy a 78m2 refurbished apartment in central Lisbon’s trendy Cais do Sodré suburb. As seen in Table 1.3, adding the Portuguese purchasing fees increases the total investment amount to €550,150.

The average rent in Cais do Sodré is around €30.78/m2, so this apartment can earn around €2,400 per month. Table 1.4 shows the taxes non-resident foreign owners pay on the annual income of €28,800.

These amounts reduce the yearly return to €18,486. The ROI when owning and renting out this apartment for one year is 3.4%.

Apartment Block in Brussels, Belgium

For €500,000, you could purchase a fully-rented apartment block situated in Anderlecht, the cozy heart of Brussels. 

The tax exemption (abatement) Brussels offers on the first €175,000 of the purchase cost is subject to strict conditions. This building meets criteria such as being under full ownership and a sales price of €500,000 or less. 

However, the property concerned must also be listed as the owner’s primary residence for an uninterrupted period of five years.

As you’d be buying the building for rental income rather than a main home, you wouldn’t qualify for the exemption. Therefore the 12.5% transfer tax, notary fees, and administration costs apply to the full price of €500,000.   

As table 1.5 shows, the total investment for this building is €572,250.

The annual immovable property tax of 40% and Anderlecht municipal tax of 5.5% applies to the building’s Cadastral income (CI). The CI is the net average rent the property earns in one year at a specific reference date, in this case, 1 January 1975.

We estimated the building’s rent in 1975 using an inflation calculator, then calculated the CI to be €9,094.    

The four apartments in the building earn monthly rents of €800, €500, €393, and €365, totaling €2,058. This brings the property’s annual rental income to €24,696.

After taxes, the apartments earn an estimated €20,558 per year.

The yearly ROI for this Belgian building is, therefore, 3.6%. 

Which Country is Best for Long-Term Real Estate Investment?

Belgium is the place to invest in long-term real estate, with an annual ROI of 3.6%. 

The country’s high transfer costs are offset by the fact that rental income is taxed at the CI value. 

Short-Term Real Estate

With around 2.9 million hosts and over 7 million listings worldwide, Airbnb remains a popular accommodation choice amongst travelers. We compared the ROI of the above three properties if listed on Airbnb. The average yearly incomes were determined using an Airbnb calculator.

56m2 Apartment in Madrid, Spain

The same apartment in Recoletos with total purchase costs of €545,500 would earn approximately €31,700 in one year. This calculation uses a room rate of €134 per day and an occupancy rate of 65%.

Spain doesn’t impose any extra tax on Airbnb rentals, provided there are no full-time workers employed at the premises. Additionally, you mustn’t offer hotel services such as catering, laundry, and cleaning to qualify for this VAT exemption.

Table 2.1 shows short-term rentals owned by non-residents are still subject to a 24% income tax on all earnings made from the property. After income and property taxes, the yearly return of this Airbnb listing is €20,592.

The ROI for short-term rentals of this apartment is 3.8%.

78m2 Refurbished Apartment in Lisbon, Portugal

The trendy Cais do Sodré apartment costing €544,000 to purchase would earn around €27,200 per year as an Airbnb listing. The daily room rate is €104, with an occupancy rate of 72%.

As seen in table 2.2, non-residents of Portugal must pay a 28% income tax and 0.45% in council duties. After paying these taxes, the return is €17,334 annually. 

Short-term rentals are considered a business in the country. You’re required to apply VAT to room charges and pay this amount to the authorities.

This apartment’s ROI amounts to 3.2% for short-term rentals.

Apartment Building in Brussels, Belgium

The Anderlecht apartment building (with a €572,250 purchase cost) would earn around €20,427 annually as a short-term rental. The daily room rate is €100 at a 50% occupancy rate.

You’ll also have to add VAT to room charges and pay this to authorities.

The immovable property tax and municipal tax apply to the CI rather than actual rental income. Therefore, you’d pay the same €4,138 you would when using the property for long-term rentals. 

The apartment building’s ROI, when listed on Airbnb, is 2.8%.

Which Country is Best for Short-Term Real Estate Investment?

With an annual return of 3.8%, Spain is best for investing in a property listed for short-term rentals. 

The Spanish capital boasts an impressive assortment of monuments and museums that attract enormous numbers of tourists each year. In turn, this drives the demand for short-stay accommodation and earns owners a healthy daily room charge.   

Commercial Real Estate

Commercial real estate shows signs of recovering to pre-pandemic levels. In particular, buildings used for industry and logistics have shown incredible resiliency, further driving the demand for these properties.

We compared the return of investment in each country when purchasing a warehouse in an industrial area of the capital. The monthly rent was estimated using yearly averages per square meter in each city.

186m2 Warehouse in Madrid, Spain

With €500,000, you can purchase a 186m2 warehouse in Cuatro Camino, Madrid’s commercial area. This street-level property is suitable for both industrial and logistical use. With purchase costs, your total investment rises to €545,500.

Table 3.1 shows the average warehouse rent in this area is 75€/m2, which brings the total yearly income to €167,400. After income and property taxes, the annual return is €123,724.

The yearly ROI of commercial property in Madrid, Spain, is 22.6%.

190m2 Warehouse in Lisbon, Portugal

€500,000 gets you a 190m2 street-level warehouse in Alcantara, the industrial area of Lisbon. The transfer tax and stamp duty bring your total investment to €550,150.

Table 3.2 shows you can expect an annual income of €109,440 from this property. Income and council taxes leave you with a return of €76,547.

The ROI of a warehouse in Lisbon, Portugal, is 14%.

350m2 Warehouse in Brussels, Belgium

Your €500,000 gets you a sizable 350m2 warehouse in the Forest municipality of the capital. After transfer costs, the total purchase price of this property is €572,250.

The average rent of commercial premises in Brussels has risen to €58/m2, making the annual income €243,600. 

You’ll pay the 40% immovable property tax for the warehouse and a 7% municipal tax in the Forest region. These taxes apply to the CI of the property. Using an inflation calculator, we estimated the warehouse’s CI at €88,865, bringing the total tax bill to €41,766. 

This leaves you with an annual return of €201,834. The ROI on this Brussels property is 35.3%.

Which Country is Best for Commercial Real Estate?

The Brussels warehouse is the clear winner with an ROI of 35.3%

With monthly rents of warehouses projected to increase in the coming years, investing your money in Belgium could be a wise and lucrative move.

Is Commercial Real Estate Investment Dead?

Commercial real estate is far from over. Our calculations show these acquisitions are more profitable than long or short-term rentals. As the economy in Europe grows in 2022, so will investor interest in commercial premises. 

In addition, the demand for storage space is growing due to e-commerce. Online purchases were a lifeline for many businesses during lockdowns, and these sales show no sign of slowing.

The number of distribution and storage facilities required by web stores has resulted in them snatching up vacant space in record time. All of this is good news for investors who can take advantage of this boom in the market.

Where Should You Invest Your 500k?

Investing in commercial real estate currently results in the highest capital growth. Based on our example calculations, Belgium offers the greatest return on investment at 35.3%. 

Belgian property sales and development are the most optimistic, with prices and rent predicted to strengthen over the remainder of the year. With the high demand of storage space in the country, we think capitalizing on Belgian real estate is the most attractive prospect.  

Controlling an offshore investment is difficult to do alone. Use an international wealth management team to help you navigate the foreign tax implications of placing your wealth in an overseas jurisdiction. Contact us to learn more. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.