From bricks to bonds

Over recent years, local investors have increased their focus on the Maltese real estate market. This attention highlights planning concerns, oversupply issues, and housing affordability challenges. Josef Cutajar, financial analyst, and Justin Mizzi, real estate valuer, delve into the central role of real estate in the Maltese capital market.

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Over recent years, local investors have been paying increased attention to the state of the Maltese real estate market. This heightened focus mainly centred on the following aspects: planning concerns, particularly relating to overdevelopment and the quality and sustainability of our product; questions about oversupply, primarily in the office and hospitality sectors; and housing affordability issues.

It is no secret that real estate is at the heart of virtually every local investor, either directly through property ownership for commercialisation, leasing, development, and sale purposes or indirectly via financial instruments connected with the real estate sector.

In this respect, although it is relatively common practice for financial commentators and journalists to regularly report on the trends, statistics, and performance of the Maltese real estate market, there seems to be some disregard for how the sector features across the local capital market.

It is essential to provide a perspective on how central the real estate sector across the Maltese capital market is. Most of the 32 companies listed on the Regulated Main Market (official list) of the Malta Stock Exchange ("MSE") are in some way or another exposed to the local real estate market, including the core domestic banks (namely, APS Bank p.l.c., Bank of Valletta p.l.c., HSBC Bank Malta p.l.c., and Lombard Bank Malta p.l.c.), which are hugely exposed to the real estate market through mortgages and commercial property loans.

However, twelve of these 32 companies can be categorised as directly related to the real estate sector. Six of these companies also have bonds listed on the Regulated Main Market (Official List) of the MSE. These comprise AX Real Estate p.l.c., Hili Properties p.l.c., Malta Properties Company p.l.c., MIDI p.l.c., Plaza Centres p.l.c., and International Hotel Investments p.l.c. ("IHI")—the company behind the Corinthia brand.

Although IHI is principally involved in the hospitality segment, in practice, it can be viewed as a real estate company when considering its sizeable asset base of hotel and commercial properties in Malta and internationally. Furthermore, unlike hotel operators, hotel property companies like IHI usually test pricing and valuation against metrics, standards, and methods typically applied within the real estate space.

Looking at the numbers

In aggregate, the property-related equity issuers have a market capitalisation of circa €840 million, representing around 18% of the local equity market's total market capitalisation of €4.81 billion. However, nearly a third of the market capitalisation of these twelve equity issuers is in IHI, which has a market capitalisation of approximately €265 million.

AX Real Estate p.l.c. comes next with a market capitalisation of €132.78 million, while the remaining ten property-related companies have a market capitalisation of less than €100 million. These range from the mid-sized Malita Investments p.l.c. and Hili Properties (a subsidiary of Hili Ventures Limited), which have a market capitalisation of circa €96 million and €83 million respectively, to the smaller-sized companies such as VBL p.l.c. (€57 million), Tigné Mall p.l.c. (€47 million), and Main Street Complex p.l.c. (€7 million).

All twelve listed property-related companies operate in the commercial real estate segment except for MIDI p.l.c., whose activity mainly involves developing and selling real estate at Tigné Point and Manoel Island. Moreover, only IHI and Hili Properties have exposure to overseas real estate. Hili Properties has an interesting mix of properties, including office space, McDonald's restaurants, shopping centres, a hospital, and industrial property.

Challenging times for the equity market

Unfortunately, the fortunes of the Maltese equity market waned considerably in recent years, as reflected by the marked contraction in trading volumes and the broad downturn in share prices. This situation is currently at the top of the MSE's agenda, which, together with various market players and stakeholders, examines six strategic initiatives to improve market liquidity and investor experience.

These plans aim to reduce trading costs, enhance company relations and investor research, and promote market activity through share buybacks, executive share compensation, and the introduction of 'Liquidity Providers'.

Despite the continuous buoyant performance of the real estate market in general, nearly all share prices of the local property-related equity issuers are at a steep discount to their respective book values per share. The average price-to-book value of the nine property-related issuers listed on the MSE at the end of 2019 stood at 1.08 times. In contrast, this was at 0.67 times the end of June 2024 for the twelve property-related listed companies, which essentially means that the market is giving a one-third haircut to the valuation of these companies.

Although the downbeat sentiment across local shares might be more linked to the market per se rather than specifically attributable to the companies, there are still various avenues that companies might consider to create shareholder value.

One of these could be the possibility of consolidation through merger and acquisition ("M&A"), especially among the companies that own just a single building, as this type of activity is often regarded as one of the main drivers for any company to consider an equity listing apart from other benefits such as those related to corporate governance and transparency as well as increased visibility and prestige.

A case in point is the acquisition by Hili Ventures Limited of more than 33% of the share capital of Tigné Mall p.l.c. that took place over the past eight months, which was indeed a rare moment of quasi-M&A activity across the local capital market.

Looking at the bond market

Meanwhile, investor sentiment and participation are more upbeat in the local corporate bond market. Apart from the six companies that are both equity and bond issuers, approximately 30 other bond issuers (out of 71 companies) are heavily involved in the real estate sector.

Within this pool, the diversification aspect is also a bit wider compared to the equity market, as apart from the accommodation, lease, and development companies, there are other companies which, for instance, are involved in the supply of building and finishing materials.

Furthermore, in terms of total bond issuance, the real estate sector, in its broadest perspective, accounts for circa 55% (or €1.45 billion) of the local corporate bond market (€2.62 billion), which is indeed significant. As of the end of 2019, the size of the local corporate bond market stood at €1.82 billion, of which €1.01 billion (or circa 55%) comprised issuers closely related to the real estate sector.

A call for a new era

The real estate sector has undoubtedly been essential for the growth of the Maltese economy over the years. Part of this success has naturally been due to the local capital market, which serves as a fundraising and investment platform and an essential source of information for market participants.

Despite this track record, it is widely recognised today that the country needs to embark on the next evolution of quality and sustainability, both from an economic viewpoint and in terms of environmental consciousness.

In this respect, the interplay between the real estate sector and the capital market should be leveraged further to mobilise the necessary resources for Malta to improve its attractiveness and competitiveness, which are essential for further economic development and success.

Disclaimer

This article was written by Josef Cutajar, financial analyst at M.Z. Investment Services Limited, and Justin Mizzi, real estate valuer at Archi+ Limited. The authors have obtained the information contained in this article from sources believed to be reliable and have not independently verified the information contained herein. The article's contents are the authors' views and may not reflect the other opinions of the organisations. The article is being published solely for information purposes. It should not be construed as investment, legal, or tax advice or as a recommendation to buy, sell, or hold any security, investment strategy or market sector. Any financial instruments referred to in this article may not be suitable or appropriate for every investor. Prospective investors are urged to consult their Investment Adviser before investing. Past performance is no guarantee of future results, and the value of investments may go down as well as up. MZI and Archi+ accept no responsibility or liability for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this article.

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