The real estate industry forms an integral part of Malta’s economy, contributing 7.5 per cent to Malta’s GDP during 2018. The strong economic growth sustained by the Maltese economy in recent years has contributed towards a rise in the labour market participation rate and the influx of foreign workers within the Maltese workforce.
This has contributed to an increase in the demand for rental of office, commercial and residential space in Malta. To address such growing demand, the supply of office and commercial space in Malta has considerably increased over the last couple of years.
In terms of residential property, recent increases in prices reflect a number of factors, including the low-interest rate environment and the Government’s schemes for first-time and second-time buyers, which have encouraged demand for property investment purposes.
However, the number of development permits concerning residential property as at the third quarter of 2019 declined by 31.2 per cent on comparative basis. This significant decline is attributable to the new building regulations imposed on the construction and real estate sectors in June 2019 and is also in line with the recent slowdown in growth of prices experienced within the Maltese property market.
The recent political turmoil witnessed in the latter part of 2019 has also contributed towards increased pressure on Malta to regain its reputation and retain its recent economic growth momentum. The inability to do so might result in severe consequences on the local real estate industry as a whole.
Insight on local real estate and property management companies covered by Calamatta Cuschieri
MIDI plc
The degree of funding risk concerning the Manoel Island project has significantly increased following the Group’s announcement, stating that the discussions between MIDI and Tumas Group Company Limited in connection with developing the whole project have ceased. However, the Group is still committed towards the project and confirmed that development works will commence during Q1 2020 once the required planning permits are issued.
During FY 2019, the Group continued with the sale of the remaining Q2 apartments and also continued receiving rental income from the leasing and management of retail space at Pjazza Tigné and the catering units situated at Tigné Point. During H1 2019, the Group also submitted a full development application for the final phase of Tigné Point development (Q3). Provided that the permit is issued by the end of FY 2019, the Group plans to commence works during 2020.
Despite the recent selling pressure on the stock due to the increased level of uncertainty in terms of the Manuel Island development, and in line with the Group’s commitment towards the project, we are of the opinion that the project is still viable. Given that the Manoel Island project forms an integral part of MIDI’s growth moving forward, we believe that further clarity and direction by the Group in this regard will strengthen investors’ sentiment.
Malita Investments plc
The properties beneficially owned by the Group, namely the Malta International Airport, the Valletta Cruise Port p.l.c., the open-air theatre and the new Parliament building in Valletta, are located in prime locations and their rental income streams are secured through long-term rental agreements with relatively low risk tenants.
During H1 2019, the Group continued with the development of 680 apartments, 270 garages and 350 car parking spaces, otherwise known as the affordable housing project. As per latest interim financial statements, the Group is in line with their schedule of completion in terms of this project and expect the whole project to be completed during 2022.
Although we like the business model of the Group, we believe that the current market price already reflects large portions of future rental income expected to be generated from future disclosed projects. However, we believe that given Malita’s low risk business model, the maintained dividend yield of circa 2.5 per cent, together with a potential partial upside in share price are all meaningful reasons to hold the stock.
Malta Properties Company plc
Following, MPC’s spin-off from GO, the Group’s strategy has been to reduce significantly its dependence on GO and adopt a multi-tenant strategy. Although this will possess its own challenges, such strategy will help to diversify the Group’s client base and increase its returns. In line with the Group’s announcement issued in Q1 2020, MPC confirmed that it has entered into an agreement to purchase the HSBC Call Centre in Swatar, with MPC retaining the current tenants after concluding the final deed of acquisition.
Excluding the properties which have been recently developed (The Bastions Office Complex in Floriana), those which are in the course of construction (Zejtun Exchange), those which are embarked for development going forward (Marsa Spencer Hill Exchange, Birkirkara Exchange and Naxxar Exchange) and those which are for sale or have recently been sold (St George’s Exchange and St Paul’s Bay Old Exchange), the Group still owns seven properties which remain underdeveloped across several locations across Malta, including Rabat, Mosta, Victoria (Gozo), Birkirkara and St Paul’s Bay.
If MPC had to consider developing these properties, such developments might substantially increase the Group’s profitability potential, both from an income and valuation perspective. Nevertheless, we remain cautious that there are still low prospects of an increased dividend distribution in the short term given the high capital expenditure requirements to fund future projects.
Trident Estates plc
During FY 2019, Trident continued with the development of Trident Park, whereby works progressed in line with the Group’s construction schedule and it is envisaged that Trident Park will welcome its first tenants in Q1 2021. Management confirmed that the Group is already in negotiations with multiple prospective anchor tenants to occupy the newly built offices once the development is fully completed. The project is budgeted to cost in the region of €50 million and is to be financed partly through the Company’s available bank facilities and through the €15 million rights issue which was successfully undertaken throughout the second half of FY 2019.
In terms of Trident’s current operations, the revenue and profitability potential of the Group has also been boosted during FY 2019 following the renegotiation of the lease agreement relating to Scotsman Pub. However, we find it difficult to justify buying interest given the current price levels.
Plaza Centres plc
In line with local industry peers, the Plaza is benefitting from an increase in occupancy and rental rates. The Company generates 70 per cent of its revenue from the Plaza Shopping Centre’ and the remaining 30 per cent from the Tigné Place. In respect of the latter, Plaza recently announced that it has entered into a preliminary agreement to sell this property.
This will enable the Company to realise the capital gains on this property, which was acquired in 2016. Despite this, we are of the opinion that further clarifications are needed from the Company on the expected selling price and the subsequent use of proceeds in order to quantify the gain for the shareholders from this proposed transaction.
Tigné Mall plc
The marginal improvement registered by the Group during FY 2019 is attributable to an increase in rental revenue and contribution from the operation of the car park. The Group’s results for H1 2019 were also impacted by an increase in finance costs, as a consequence of the additional bank financing acquired during the latter part of FY 2018 to purchase 132 new car parking spaces. This increased the Group’s parking capacity to 355 car parking spaces.
Due to its strategic location and year-on-year increase within the overall footfall, the mall has a strong record of full tenant occupancy. Despite this, we are of the view that there are no major growth opportunities or projects in the Group’s pipeline.
As a result of the Group’s positive outlook and consistent improvement in revenue and profitability potential, coupled with TML’s attractive dividend yield offering (circa 3 per cent), we are of the view that the main reason to buy the stock primarily relates to TML’s constant dividend distribution and its potential to increase this further in the near term.
Main Street Complex plc
The company has recently achieved full occupancy within the mall which has resulted in an overall increase in rental income as per latest interim financial statements. Of note, MSC also started receiving additional income derived from a solar photovoltaic system which was installed during FY 2018.
A major concern associated with the company’s overall operations stems from the increasing popularity of e-commerce which may negatively impact the performance of retail outlets, a risk faced by all industry peers. This concern is sustained through the mall’s location and through the threat of new entrants in the shopping mall sector.
Nevertheless, we are of the view that the company’s share price, already reflects rental income expected to be generated by MSC in the foreseeable future. In line with MSC’s limited growth opportunities, sectoral risks, the high pay-out ratio and small market cap for which we would expect a premium, we do not see any meaningful buying interest in the stock.
This article was issued by Andrew Fenech and Rowen Bonello, research analysts at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.