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Article by: Trafford Busuttil stephanied@propertylinemalta.com Published: 09/12/2008

Property investment

IS IT THE RIGHT TIME TO INVEST IN PROPERTY?

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 date of purchase, 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. Why? 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% 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.

If one had to look beyond our shores the international property market is split into different categories: i) established markets, such as Monaco, UK, Italy, France, Spain and so on. ii) rising markets, such as Malta, Dubai, Abu Dhabi, Morocco, Egypt iii) emerging markets, such as China, Brazil, Moldova and iv) emerging markets in a an established environment such as Sicilyor Eastern Algave in Portugal.

All these markets provide different investment opportunities and risk levels. If one had to invest in an established market, property prices are higher, rental returns would range between 4-6%, and capital growth is a single digit percentage due to the secure nature of the investment.

Rising markets are those property hot spots that offer the perfect entry level on a capital appreciation graph. They are in an optimum position for investment, since they are on the way to becoming established markets. Property prices are affordable, offering excellent rental returns, and stable capital growth percentages.

Emerging markets offer lower property prices, reasonable rental returns, depending on tourism numbers and high capital appreciation. However, these are not proven markets and investments would take a number of years to mature.

When thinking of which market to invest in one must actively consider a number of factors. These should include:

a) The risk level one is prepared to take;

b) The reason for investing in a particular country;

c) The particular locality of the chosen country one is going to invest in;

d) The nature of the purchase whether lifestyle or investment;

e) The underlying object of the purchase whether it is capital growth or rental returns or both?

The answers to these questions vary according to the individual, but the vision is common to all: that of investing in a product that, if researched and studied, will not only provide enjoyment for family and friends but also provide a source of income and a means of planning for the future.

For example let us look at Dubai, the tiny emirate in the Persian Gulf that everyone is talking about. It is fair to assume that if any capital city in Europe were even beginning to think of building the amount of property that Dubai is currently constructing, it would cause something close to mass hysteria. The Emirate’s 1.4 million population is set to grow by 8% year on year, equivalent to 112,000 additional people moving to the Emirate per annum. This year only, rents have increased by 10% and property prices were up by 5-10%. A growing population, increase in foreign direct investment, increase in office rentals, increase in residential rentals, increase in people moving to the city, all present the perfect ingredients for success for the real estate investor.

No matter the nature of the purchase, one essential ingredient to a successful outcome to any property transaction is what is known within the industry as an ‘Exit Strategy’. This is of the very essence, no matter where you invest, it is extremely important to know that the country and area where you are investing has what is known as a home grown property market, that is to say, that property sales are not solely dependent on overseas purchasers but that locals are also actively involved in that market.

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

 

External Article Link: http://www.property-partnership.com/overseas-property-guides/overseas-property-guide.cfm?id=197

Article Link: http://www.property-partnership.com/overseas-property-guides/overseas-property-guide.cfm?id=197

Please contact the author at stephanied@propertylinemalta.com for more information.