Cryptocurrency as an alternative to real estate investments

In 2022, the real estate sector underwent a difficult period due to high inflation and the accompanying high-interest rates on financial markets. The increased interest rates made stocks less attractive as an investment instrument, while bonds and even savings accounts became more popular.

Traditionally, real estate was a safe and popular choice in the Dutch investment market due to its relatively low volatility and steady appreciation. However, changes are on the horizon, partly due to current macroeconomic conditions and changes in Dutch laws and regulations.

Changes within the sector

2022 began with an optimistic outlook due to the gradual lifting of coronavirus measures and increasing consumer spending. This optimism also spilled over into the real estate sector, where companies slowly began to consider real estate positions again. Unfortunately, the optimistic mood was abruptly disrupted by the conflict between Russia and Ukraine, which led to an energy crisis, very high price increases and ultimately rising inflation. The high inflation also had negative consequences for the real estate sector, as central banks had to raise interest rates to counter inflation. This negatively affected real estate investors, as they had to pay more on their loans. The high interest rates also had a negative impact on the value of real estate. In the Dutch real estate sector, a declining trend in the value of owner-occupied homes was observed for the first time in a long time.

In addition, in the Netherlands, the focus is mainly on construction projects within the city, but this brings many difficulties. Think of high construction costs, permits, and many objections. Construction costs have significantly increased due to inflation, resulting in less construction and buyers sometimes having to wait years before a city project is completed. Moreover, the number of buyers has also decreased because borrowing has become more difficult due to the high interest rates. At present, dual-income earners with a median income earn a combined salary of €65,000 per year. With the current interest rate, they can borrow around €304,000, which means that 80% of the current offer is outside their budget. For individual starters, the current market is even more disadvantageous, as they have a choice of only one percent of the total offer.

Another important trend in 2022 was the growing interest in sustainability. Investors were increasingly willing to invest in real estate that was energy-efficient and environmentally friendly. This also had implications for the development of new real estate projects, where sustainability became an important criterion.

Due to high real estate prices and the increasing interest in sustainability, the development of new real estate projects became more challenging. Finding suitable locations and obtaining permits became more difficult, causing some investors to shift their attention to existing real estate projects that could be renovated.

In addition to the previously mentioned negative conditions in the Dutch real estate sector, there is another particularity that throws even more spanners in the works; the tightened Dutch laws and regulations.

The Netherlands tightens laws and regulations

In 2023, various changes will take place in the Netherlands that may affect real estate investors. One of these factors is the change in Box 3, where savings and investment assets are taxed. At present, Box 3 uses a notional yield, an assumption of the yield one obtains on the assets. In 2023, according to the tax authorities, the notional yield will be closer to the actual yield percentage.

For investments such as stocks, bonds, and real estate, one must take into account a notional yield of 6.17%. A large part of the real estate investors finds this new yield to be too high an estimate for real estate, as a real estate investor typically achieves a yield of 3%. In addition to the new yield, the transfer tax for non-residential properties, such as commercial buildings and land, has recently been increased from 8% to 10.4%. This increase in transfer tax and the new yield together make the real estate sector even less attractive for investors.

Is cryptocurrency a good alternative to the real estate market?

The combination of the factors mentioned earlier makes the Dutch real estate sector a difficult market to achieve high and stable returns. As a result, investors are slowly looking at alternative investments. We have seen in recent months that interest in cryptocurrency from the real estate sector is increasing rapidly.

Hodl recently visited the Mipim real estate fair in Cannes. One topic we received many questions about is tokenizing real estate. Tokenizing real estate refers to the process whereby ownership of real estate is represented by tokens issued and traded on a blockchain. This can provide various benefits such as increased liquidity, lower transaction costs, and broader access to the real estate market.

At present, tokenizing real estate is still a relatively new concept, and there are still some challenges that need to be overcome, such as regulatory issues and the development of suitable technologies. However, some projects have already started to make real estate tokenization possible, and the expectation is that this will further increase in the future.

Besides the technical implementation of blockchain technology, the cryptocurrency market offers an interesting opportunity to diversify a portfolio Despite the volatile nature of the market, the industry has a high and continuous pace of adoption. Furthermore, more and more organizations are beginning to experiment and use different technologies, such as Amazon Web Services, which recently entered into a partnership with the crypto protocol Avalanche.

The crypto sector will be an interesting market for investors in the coming years due to the continuous growth in users, liquidity, and interest from organizations. An important element for successful investing is an optimally diversified portfolio. Accordingly, we advise against investing your entire net-worth in cryptocurrency; however, a balanced portfolio should have exposure to alternative or emerging investments. We believe that cryptocurrency can be a good addition to an investment portfolio, as long as it is thoughtfully considered. As aforementioned, the crypto market is a young and relatively unknown market, but it has shown over the years that it can generate high returns and possibly bring balance to an investment portfolio.

If you would like to learn more about whether crypto fits in your portfolio, please contact us to discuss the various possibilities.