2008 - Freeze, Squeeze or Opportunity?
Much has been said about the Maltese property market in 2008 – There are those that spelt doom and gloom, others took a more cautious approach and there were those that remained totally upbeat and still saw a great future in the market. Which view is the correct one?
Whatever anyone says is immaterial especially when the subject under discussion is your Home, for many our largest single investment, it has to be you, the homeowner or would be homeowner, to digest what you read and decide with an open mind on the future of your investment.
One myth that should be clarified is that the property market is immune to any illness, no coughs, no colds, since it’s been so healthy for so many years. A perfect analogy to the situation is that of a child that is rarely sick and as soon as he catches a cold, the parents start thinking that the child is living the last few days of his life. Coughs, colds and bouts of flu are important in the development of us humans and the same goes for the property market. Nothing can continue growing and growing without taking a short rest.
To understand the events of 2008 one must take a look at the preceding years. Over the past few years, it seems that the majority of Maltese with disposable funds became developers. Why? They saw the market doing exceptionally well and thought that the only way for this industry was up. However, people failed to understand that the market they were investing in was also fuelled by a number of fiscal amnesties, in particular two overseas fund repatriations and another amnesty on cash funds held at home. A large portion of these funds found themselves into the market, since the island is extremely limited in the investments it offers and above all because the property market is a safe market. This was a spiked period and it was obvious that things were to go back to pre boom levels, which in fact happened.
Those that purchased land on the high side have to correct their prices to market value, if they want to sell, since no one is going to invest in something that is over current market value. Market value properties always sold well and will continue to sell well. One might argue that they can hold onto the property, which they can, however, please keep in mind inflation and Bank interest.
From an investment perspective, property is an investor’s dream. If you had to invest in shares, you would have to pay 100% of your investment up front and hope that the market performed. If you are risk averse, and would opt for bonds with a reasonable rate of return, you would still have to pay 100% of your investment up front. On the contrary, if you invest in property, you would generally pay 10% of the value of the property with the remaining balance financed thorough a Bank loan.
If you, the investor, had to purchase 10,000 shares in company X at € 10 per share you would have to pay € 100,000 on settlement date, and the same goes for bonds, whereas if you had to invest in a € 100,000 property your immediate capital outlay would be €10,000, since the other € 90,000 would be financed by means of a bank loan. Within the industry this is referred to as leverage, more precisely, high leverage as a large proportion of the property has been bought with borrowed money. Admittedly, one can also invest on the Stock Exchange by means of a loan for which other securities or property have been put up as collateral. However, when buying property you are in the fortunate situation of being able to put up the same property as collateral or part collateral.
There is no other investment vehicle that places you in the same favourable position that the property market puts you in. Which other investment can you think of that allows you to invest now and pay later? Which other investment finances it’s own way, in that the investor can rent out the premises and with the income so generated finance the monthly mortgage payments? If this business model is utilised, which other investment allows you to invest a mere10%, achieve 100% ownership, have the rental income pay for the loan and get a single or double digit percentage capital appreciation per year? Only investment in property can achieve such a remarkable performance.
Over the past 30 years the annual average returns on real estate investments worldwide have been 15.6%, as against to 12.3% for equities, 8.5% for bonds, and 6% for cash. This is further proof that property is a safe and secure investment. It is a product you can physically see, touch, enjoy and, most important of all, control personally, whereas other investments are held and managed by third parties.
The current international market situation is an ideal time to invest. Interest rates are on a downward trend, with the European Central Bank lowering it’s base rate by 1.75% over recent weeks, prices are corrective, rental returns have never been better, and local banks are still very willing to finance property purchases. Today’s market is an incredible investment opportunity. What doom and gloom, position yourself for the next boom, if you will!
Much has been said about the Maltese property market in 2008 – There are those that spelt doom and gloom, others took a more cautious approach and there were those that remained totally upbeat and still saw a great future in the market. Which view is the correct one?
Whatever anyone says is immaterial especially when the subject under discussion is your Home, for many our largest single investment, it has to be you, the homeowner or would be homeowner, to digest what you read and decide with an open mind on the future of your investment.
One myth that should be clarified is that the property market is immune to any illness, no coughs, no colds, since it’s been so healthy for so many years. A perfect analogy to the situation is that of a child that is rarely sick and as soon as he catches a cold, the parents start thinking that the child is living the last few days of his life. Coughs, colds and bouts of flu are important in the development of us humans and the same goes for the property market. Nothing can continue growing and growing without taking a short rest.
To understand the events of 2008 one must take a look at the preceding years. Over the past few years, it seems that the majority of Maltese with disposable funds became developers. Why? They saw the market doing exceptionally well and thought that the only way for this industry was up. However, people failed to understand that the market they were investing in was also fuelled by a number of fiscal amnesties, in particular two overseas fund repatriations and another amnesty on cash funds held at home. A large portion of these funds found themselves into the market, since the island is extremely limited in the investments it offers and above all because the property market is a safe market. This was a spiked period and it was obvious that things were to go back to pre boom levels, which in fact happened.
Those that purchased land on the high side have to correct their prices to market value, if they want to sell, since no one is going to invest in something that is over current market value. Market value properties always sold well and will continue to sell well. One might argue that they can hold onto the property, which they can, however, please keep in mind inflation and Bank interest.
From an investment perspective, property is an investor’s dream. If you had to invest in shares, you would have to pay 100% of your investment up front and hope that the market performed. If you are risk averse, and would opt for bonds with a reasonable rate of return, you would still have to pay 100% of your investment up front. On the contrary, if you invest in property, you would generally pay 10% of the value of the property with the remaining balance financed thorough a Bank loan.
If you, the investor, had to purchase 10,000 shares in company X at € 10 per share you would have to pay € 100,000 on settlement date, and the same goes for bonds, whereas if you had to invest in a € 100,000 property your immediate capital outlay would be €10,000, since the other € 90,000 would be financed by means of a bank loan. Within the industry this is referred to as leverage, more precisely, high leverage as a large proportion of the property has been bought with borrowed money. Admittedly, one can also invest on the Stock Exchange by means of a loan for which other securities or property have been put up as collateral. However, when buying property you are in the fortunate situation of being able to put up the same property as collateral or part collateral.
There is no other investment vehicle that places you in the same favourable position that the property market puts you in. Which other investment can you think of that allows you to invest now and pay later? Which other investment finances it’s own way, in that the investor can rent out the premises and with the income so generated finance the monthly mortgage payments? If this business model is utilised, which other investment allows you to invest a mere10%, achieve 100% ownership, have the rental income pay for the loan and get a single or double digit percentage capital appreciation per year? Only investment in property can achieve such a remarkable performance.
Over the past 30 years the annual average returns on real estate investments worldwide have been 15.6%, as against to 12.3% for equities, 8.5% for bonds, and 6% for cash. This is further proof that property is a safe and secure investment. It is a product you can physically see, touch, enjoy and, most important of all, control personally, whereas other investments are held and managed by third parties.
The current international market situation is an ideal time to invest. Interest rates are on a downward trend, with the European Central Bank lowering it’s base rate by 1.75% over recent weeks, prices are corrective, rental returns have never been better, and local banks are still very willing to finance property purchases. Today’s market is an incredible investment opportunity. What doom and gloom, position yourself for the next boom, if you will!
Article published in the Economic Update by
Trafford Busuttil
Chairman of the Real Estate Trade Section – Malta Chamber of Commerce
President of the Federation of Estate Agents
Managing Director of Propertyline International
Chairman of the Real Estate Trade Section – Malta Chamber of Commerce
President of the Federation of Estate Agents
Managing Director of Propertyline International
