Today’s extreme low rate environment might be pushing investors towards riskier securities trying to capture higher returns, Steve Ellul, a senior investment manager at Valletta Fund Management, has warned.
“Ten years ago, relatively safe Malta government bonds used to yield close to 4.3 per cent for 10-year maturities. Today, those same bonds yield less than 1.5 per cent and investors wishing to maintain the level of return they used to get will have to invest in sub-investment grade bonds.
“These bonds carry a risk of default which is far higher than local sovereign bonds and that is also why they offer a relatively higher return. In reality, the return being offered on such risky assets is not high enough to make up for the higher risk. The main peril is that investors might be inadvertently taking up a level of risk which is higher than their personal risk tolerance,” he said.
He stressed that this was the main benefit of allowing investment managers to have an element of discretion in asset class selection
“In this way, the investment portfolio will be continuously exposed to those assets which the manager believes offer the best risk/reward trade-off.
“The downside is that the actual exposure to a given asset class will change at the discretion of the fund manager. Having said that, such funds allow for specialised decisions to be made by experts in the field,” he said.
If you get professional guidance and buy at the right price, your investment should be profitable no matter what the market is at the time you decide to sell
Christian Debono, HSBC Bank Malta’s network wealth director, said understanding your own risk appetite was important: “Financial planning advisers will take the time to understand you and your future ambitions and recommend tailor-made solutions to meet your goals, whether you are planning for your retirement, children’s education, managing your wealth and organising protection for your family’s future.”
However, Jeff Buttigieg of Re/Max stressed that the Maltese are still enamoured of bricks and mortar: the company’s latest Insights survey showed that 91 per cent of locals preferred a property investment than stocks, shares or any types of bank deposits.
He also believes that the soaring demand for buy-to-rent has added a whole new dimension to the boom.
“Buy-to-rent is the result of the strategic work past and present administrations have done over the last few years to create an infrastructure to not only attract foreign investment and companies to relocate to Malta and set up shop, but to also create jobs for the local community.
“The healthy scenario of foreigners moving to Malta – for either work assignments or other reasons – encourages investors to purchase buy-to-rent homes, and entrepreneurs to purchase and develop land in order to accommodate for the demand of foreigners that are looking to rent and those who wish to purchase a property.”
However, it is not just foreigners that are boosting the property market. He pointed out that, according to national statistics, there was an increase of 24 per cent in local property sales, of which locals accounted for 94 per cent of the sales.
“We are not financial advisers and investments have their ups and downs just as the property market has its cycles. But thankfully, with solid financial institutions and a lack of dependency on foreign investment, we survived the last economic downturn,” he said.
One of the problems with property is that it is not very liquid should people want to access their investments.
“Property has never been very liquid unless the price is so attractive that it generates an immediate interest,” Adrian Friggieri, the branch manager of ThirtyFour Real Esate explained.
“The point of investing in property is that at least your money appreciates in value and you can generate income via rentals rather then waiting for interest.
“Buying to let can also be very tricky when it comes to truly calculating your percentage return on investment; that’s the real key to success for property portfolio growth.”
In this low interest rate scenario, it is perhaps no surprise that real estate agents also consider property to be one of the safest investments.
“When you are investing in the right kind of property, you are safe because no matter what, you are seeing, enjoying and making a profit straight away from the property you invested in,” Owen Muscat, managing director of Sky Estates, said.
The demand for rental property is getting higher by the day
He argued that with demand as it stands, should the investor need to liquidate, there would always be a buyer waiting to purchase the property at the right price.
It is not without its pitfalls, however, as the return on the investment depends so heavily on the price the investor pays at the outset.
“If you get professional guidance and buy at the right price, your investment should be profitable no matter what the market is at the time you decide to sell,” Mr Muscat said.
“And the economy is bringing foreigners from all around the globe to Malta, therefore the demand for rental of property is getting higher by the day. This is resulting in many investors buying property to put on the rental market who are getting high returns for their investment.”