I guess, like most people, I have been socialised to think that property and land (I shall use these two words interchangeably) make an excellent investment. I also reckon that most Maltese believe that the recent mini-recession in the property development market is just a temporary set-back and that property will continue, over the long term, to be a sound investment choice.

Donald Trump is quoted to have said (and I can just see many Maltese nodding their head in approval “I just love real estate; it’s tangible, it’s solid, it’s beautiful. It’s artistic from my stand point and I just love real estate”. How can one argue with him?

Research in America shows that over the long-term, the real price (meaning inflation adjusted) appreciation of property – over the last 100 years – has been less than one per cent per annum. Sure, over the short term, and during a boom, when speculation is rife, property can appreciate to double digit percentage figures but the point is that it will always return to the long-term trend line of 0.4 per cent per annum.

If this research, applies to Malta i.e. that property and land only appreciate at best by one per cent per annum over the long term, it would conflict drastically with the locally held belief that property tends to appreciate steadily and rapidly over time. To be fair, land and property make an excellent inflation hedge. So if your objective is to protect your investment against inflation over time, then property or land are a wise choice but they do not provide you with a significant return on investment after adjusting for inflation.

You’d be better off investing your money in stocks and shares which have proven that over the long term and after adjusting for inflation, the average return on stocks and shares is circa seven per cent per annum. At that rate your investment doubles every 10-12 years! Again there are times when you can make much more than a mere seven per cent but the research I am quoting is looking at the long-term in both cases.

This doesn’t mean that property, as an investment option, is dead and buried; far from it. It just means that you have to be more qualitative and strategic about your investment choices e.g. spreading your investments between property, shares, bonds, bank savings and the like. For instance, an income-producing property (as opposed to your own residential property for instance) is far more attractive. If you buy a commercial property which fetches a good rental income you are not only protecting your investment from inflation but also earning circa a yearly five per cent of the value of your property thanks to rental income.

This would get you close to the seven per cent that one could, over the long term, earn from investments in stocks and shares. Also, and at the expense of stating the obvious, there is a huge difference between a property bought with one’s own savings or a windfall inheritance and one using bank borrowing. The latter would erode your rental income with interest payments.

There is another problem with property: First-time property buyers are crucial to the industry because they contribute a constant flow of new demand. The concern, however, is that (a) the cost of living is already high and set to continue increasing (and this affects disposable income) (b) that the gap between the income of first-time home buyers and affordable properties on the market is widening and (c) a growing number of persons who are approaching old age, which will probably need to liquidate their house in order to pay for their old age (trends indicate that people are generally living longer), will increase the supply of houses on the market. Combined, all these factors could lead to a depressed demand for property in the future which will keep prices down.

Finally, property is comparatively illiquid as an asset and that is why you can’t have all your savings or investments invested in it. As Warren Buffett is fond of saying, you only find out who is swimming naked when the tide goes out! What I am trying to say is that if you need to liquidate your property at the same time as everyone else in the market (2010 being a case in point) or you need to liquidate quickly, you might be surprised to find out just how illiquid your asset actually is.

Remember: Liquidity is defined as the ability to sell an asset today without suffering a significant downward movement in the original price. If your house is estimated to be worth €500,000 but when you try to sell it on a particular day you either fail to get an offer which matches your asking price or you receive no offers at all, this means that your asset is illiquid.

In my opinion, the only reason why we haven’t (yet) heard of some big bankruptcies in the property development sector is because the banks have wisely been very supportive; although there will come a time when developers will have to start selling even if at loss and that time might not be far away.

Remember, liquidity is a relative concept. In a bear market, what constitutes as liquid is very different to what constitutes as liquid in a bull market; and you only find out how liquid (or illiquid) your assets actually are when you need to sell! There is no point owning property worth hundreds of thousands of euros, if it is not generating any positive cash inflows and if and when you urgently need to liquidate, you struggle to sell it quickly.

This is why cash will always be king; cash is the most liquid of assets. Therefore, you’d be wise to spread your investments in a variety of investment classes namely property, shares, bonds and a short-term fixed savings account(s) with a reputable bank.

So, is property still a good investment? My answer is a qualified yes. It is not as great an investment as a lot of people make it out to be and only makes sense as part of a mixed investment strategy. It also depends on whether the property in question can generate a rental income and it depends on your liquidity needs over the medium term. A wise man once told me: Sell when you don’t need to sell and you’ll fetch a good price but sell when you need to sell and you’ll cry.

Mr Fenech is managing director of Fenci Consulting Ltd.