Real estate as a store of value

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The term store of value is used to describe an asset which does not depreciate in value, such as real estate, art and other collectables. One might also be tempted to add equity markets given the results over the past few years boosted by excess liquidity mainly driven by quantitative easing programs. Store of value is the term given to an asset whose value is stable or increases over time.

Money used to be viewed as a primary example of a store of value. However, it is an undeniable fact that the value of money erodes over time due to inflation, and the returns on money holdings are at best poor. Storing money in a savings account will earn you an interest of anything between .05% to 2%, and in turn, inflation will erode most, if not all, of your gains.

Even though there are plenty of assets that can act as a store of value, real estate is probably the most preferable due to its consistency in the increase of its value and potential returns. In a market such as Malta, real estate is bound to gain value assuming the demand remains stable. Apart from capital appreciation, if the real estate is put into a productive setting, you can expect to generate rental returns of up to 6%.

Liquidating a property will most probably have the same, if not more, purchasing power than when it was first purchased. The passive income would have served as interest or dividend for the investor. Whereas if one keeps their money in a conservative investment, the returns will barely keep up with inflation while asset appreciation is often uncertain.

Real estate is certainly a safer store of value compared to other asset classes, especially in a country with limited supply. The type of real estate that you own is important, following the rules of demand and supply, the more unique your holding is, the higher are your chances that you will find a buyer.

One needs to keep in mind that there are still certain drawbacks as the process of purchasing or selling a property – real estate is relatively illiquid. Taxes increase transaction costs by 5% while the lag between the ‘promise of sale’ and the actual contract increases the timeframe to liquatite. Not to mention, property sales are usually peppered with a number of conditions which if unfulfilled might mean that the sale might not go through.

According to the National Statistic Office, the Property Price Index rose by 5.6% during the last quarter of 2019, when compared with the same quarter of 2018. House price inflation remained above that in the euro area, where prices increased at an annual rate of 4.2%.

The average increase in property prices was 9.5% during the past 5 years (2014-2019), while the average increase over the previous 5 years (2008-2013) was a decrease of -0.47%, according to the Central Bank of Malta.

These figures should give you confidence that real estate is potentially one of the safest investments.

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