Why you should not invest in Property.

There, its finally been said!

Malta’s property market has seen incredible growth in the past couple of decade’s due to the introduction of residency/passport schemes, foreign investments and a booming tourism industry.

Although this has been great for the wider Maltese economy, its also come along with its own consequences. Such as, a somewhat unsustainable increase in property prices, and the rise of questionable large-scale developments all over the island.

‘Bażikament, torrijiet u krejniet kull fejn tħares!’

If you’re a property developer, speculator, investor or an estate agency, then you probably did pretty well for yourselves over the past few years, benefitting from the over-inflated property prices.

But what if you’re not?

Well then, you’re probably facing the same struggle as the remaining 60–70% of the Maltese population who are within a certain wage bracket, and/or are just starting out their careers (such as ourselves).

So before delving into the facts, and the grim reality, we’d like to note that we’re analysing property primarily as an investment (i.e for rental income and/or capital gain purposes) and not for your own inhabitance.

Wages vs Property Prices

Malta is notoriously renowned for its sky-high property prices and its bang average wages rates, so much so, that the average gross salary (before tax) in 2020 was stated at €20,196. Meaning that most people on the island were left with a mere €1.3k per month in their pockets.

Now that we understand how disappointing the average wage rates are, let’s take a look at property in Malta… 
So, according to Djar.com the average cost an apartment in Malta at the start of 2020 was stated at €310k. Basically meaning, you’re going to need 2x the average salary to acquire a loan to purchase the average apartment.

And, if you guys ever thought that gap between the average salary and the average apartment is narrowing…think twice.

In the past six years the average salary increased by approximately 18%, meaning that the total increase in wages over the five year period was around €3.6k. 
On the other hand, the prices of property increased by a staggering 31%, translating to a steep increase of around €90k over the same five year span. 
At the current trajectories, owning the average apartment will soon become an unattainable luxury for most.

If you haven’t noticed, the increase in property prices over the past six years is roughly 25X greater than the average increase in salaries.

Loan Acquisition

With the average salary, a person would need to dedicate half their monthly income for a period of 40 years to buy the average apartment in the current market conditions.

So lets face it, you’re going to need a bank loan, and getting one isn’t that simple!

Earning the average salary? With a monthly income of €1.3k, and around €12k in savings, the bank would grant you a loan amounting to €107k at the age of 25. 
To put things into context, during the beginning of 2020, that would have allowed you to buy a 51sqm ‘gebuba’ in Malta, which is around the same size as the average 2/3 car garage…let that sink in…

Working in freelance? The current global labour market has seen a staggering increase in the amount of people working freelance, so much so, that 28% of full-time workers were working for themselves in 2019, when compared to 17% in 2017.

If you’re a freelancer, it might be a bit trickier to acquire a loan. Traditional banks usually require freelancers to have a proven track-record of earning certain amounts on an annual basis. Having said that, under the current economic climate, nothing is a certainty for most.

Looking for a second property for investment purposes? Prior to the COVID-19 pandemic, the Maltese Banks were proposing to introduce a mandatory 15% deposit, and 25% of the cost the property t
o be paid off by the second year. 
So for example, if a person is looking to acquire the ‘average apartment’ for investment purposes, then the buyer would need to pay €78k by the second year. Meaning that not just anyone will soon have the privilege of acquiring an investment property.

Although this clause was never officially established, we think it’s important to note incase it’s enforced in the near future.

Unforeseen Circumstances…

Life sometimes can throw unforeseen events at us, like a random pandemic. This can cause some pretty big inconveniences in our lives, especially if you have a loan or two to pay off.

Imagine this, it’s the end of 2019, and you’ve decided to purchase your first or second property, primarily for investment purposes. 
March 2020 comes along, the property is currently vacant and shortly after the economy goes into lockdown.

Realistically you’re facing one of three scenarios:

• You lose your job and/or are on the wage supplement of €800;
• You’re forced to close your business; or
• You’re fine, lucky you.

Fast-forward to the end of the year and you might be forced to sell-off that property you bought, and possibly at a loss.

So, should I just leave excess money in the bank?

Sure, go ahead…do that and you’ll actually be losing money.

Ever heard of Inflation? It’s basically the general rise in pricing levels, which leaves you with less purchasing power.

The average interest rate of a savings account is 0.05% per year, whereas inflation stood at 1.64% in 2019. This means if you had €1k in savings at the beginning of 2018, then by the end of 2019 it’ll be worth €985 at best.

What are my options?

Well, you have a few!

Today we live in a day and age were you could pretty much invest in anything from the comfort of your home. This can range from owning 0.01% of your favourite Picasso to a small part of your favourite listed company.

So with that being said we decided to go-ahead and break-down a few of these for you.

Equities

When an organisation is planning expansion, it is common for the organisation to list its shares on a stock-exchange in order to raise finance. Through the stock-exchange the general public can acquire shares in the listed entity.

Generally speaking, if the organisation is performing well and above expectations, then share-prices rise resulting in a capital gain.

To further explain our point, we compared the returns of an investment we’ve held for a few years as opposed to the returns from holding property in Malta.

The number speak for themselves… and yes, those various marketing articles probably deceived you.

ETF’s

As a brief overview, an exchange traded fund (ETF) is a security that involves a collection of stocks, such as equities, and can be industry specific, such as an Energy, Technology or a mix.

In simple terms, it’s a basket of equities.

Just to give you an idea of the returns that a well managed ETF can generate, we decided to compare the returns of a popular ETF against property.

Ark Invest (the ETF) was incorporated in 2015, and specialises in disruptive innovation equities. Since its incorporation ARK generated an average annual return of around 30% on a yearly basis over their 4 year span. 
And If you think that’s impressive, check out the current ETF price!

Fine Art & Other Collectable Assets

Through advancements in technology, people now have the opportunity to buy equity shares in collectable assets. Collectable assets could include blue-chip art, rare whisky and vintage cars, which can be acquired through sites such as Masterworks or RallyRd.

There are many other investment opportunities out there which we’re not going to get into just yet. These really require their own dedicated posts (to be continued).

And here is the great thing about them…

If you decide to sell a property, it’s important to note that this can be a very lengthy process, with pending sales usually taking a minimum of 6 months.
On the other hand, all the assets mentioned above are liquid-able on-demand, meaning you can sell your assets and receive your funds instantly.

To Wrap It all Up

As stated above, property investing in Malta has become out of reach for most, and therefore should no longer be seen as the end-all-be-all investment. Instead, people need to remove their horse-blinkers and explore more financially rewarding investments.
The current landscape is very different to what it was, and although we are not discrediting property as a stable investment, you must always seek to diversify your assets!

Today people are faced with an incredible opportunity to own some incredible assets, and the process couldn’t have been made easier without the necessary technological advancements.

We as young visionaries feel that it is our responsibility to build a local community of like-minded people who seek to strive towards financial freedom, and participate in a community of information sharing.

Together we aim to become more informed on current and upcoming opportunities, both locally and abroad!

Together we will educate one another!