Purchasing real estate equities as an alternative to an outright property purchase for the Maltese

Abstract

This research explored an alternative strategy that could be utilised by Maltese investors when investing in real estate, potentially suggesting a change towards a more indirect approach of real estate investment on a local level. This dissertation considered the two most important characteristics found in real estate investment: periodic income and capital appreciation, and assessed the exposure gained by investors with respect to these two factors when investing either through a portfolio of real estate equities or directly by the purchase of property. Through the Jensen’s alpha value, it was observed that direct real estate investment was superior to the equities portfolio as it offered better risk adjusted returns both in terms of capital appreciation and even in terms of cash flows generated. The differences in these returns however were not as substantial, therefore suggesting that local investors could still get a decent exposure to the real estate market’s unique characteristics through equities, i.e., capital appreciation and periodic income. Part of the study included a small set of qualitative interviews which were very insightful as they provided a good understanding about the industry and all the relevant market players. Many referred to the scepticism that is present within local equities markets as such markets have been characterised by a history of underperformance and therefore, it was often suggested that investors may not be willing to shift away from direct real estate investment towards investment in real estate equities. The simultaneous use of these methods led to the conclusions that although direct real estate returns have been considered to be superior to equities, it is being faced with massive challenges as economic conditions are changing. Therefore, the utilisation of real estate equities may be considered as an option as they provide similar exposure to direct real estate investment and may be also used to address current market failures, such as social housing.