05 July 2006

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Business Today

Creating and sustaining a rental market

Ian Casolani

A continuous increase in property prices, the unfortunate growing number of separated couples, the substantial amount of new properties and large developments coming on the market, all highlight the need for a healthy rental market. This is needed more than ever before, both to provide alternative accommodation for those who cannot presently afford to buy their first property, and from a vendor’s point of view, to satisfy the purpose of those buying property for investment purposes or rental return.
To date, this market is governed by outdated and inadequate licensing policies and tax structures. Properties rented out on a long let basis for some reason still fall under the same tourism authority licensing guidelines for holiday premises, and an exorbitant licence fee, equal to one month’s rent, is expected to be paid by the landlord. This applies on rentals to foreigners and is subject to various conditions, including how long the tenant has been residing in Malta. Besides this fee, a landlord is also expected to pay VAT and is subject to declare any rental income on his/her tax return, which in most cases attracts the 35% income tax level that most people owning rental properties fall under. After deducting all these fees and taxes from the already low rental returns, which the market presently offers, a property owner is left with a miserable return on investment of between 1.5%-2.5%.
Recently, rumours of tax compliance have been creating many uncertainties in the market. Although it is evident that the market needs to be regulated, and the policies that govern it need to be updated, the way this is done is crucial to the future of the rental market in general.
There are various important issues that we have been trying to bring to the attention of both the Ministry of Finance and the Tourism Authorities.
Firstly, it is time for the government to come out with a clear and final policy on the rent laws when renting to Maltese citizens. The fact that most landlords still fear renting to Maltese, only makes it more difficult for those opting to rent a property instead of buying one. Roughly two out of every three landlords still refuse to rent to Maltese although they have been reassured that today the old rent laws do not apply to new rentals.
Secondly, it is time to disassociate the standard tourism authority policies with long lets. When a long term rental is concluded, it means that an agreement has been reached between the landlord and the tenants and both parties are probably happy with the outcome of this agreement. Therefore, no third party should have the right to dictate how equipped this property should be, whether it is air-conditioned or not, or how modern the furnishings are, as this is most probably reflected in the price and one pays for what he gets. Therefore, although we agree and insist on the tourism authority regulating and controlling the licensing of holiday properties, we think that it’s involvement in the licensing of long let properties is both a costly exercise and no longer appropriate.
We also propose a revised and more straightforward tax structure, which besides being easier and cheaper for the government to control, will more importantly enable a landlord to know exactly where he/she stands and what he/she is netting from his/her rental. This can be done by simply replacing any MTA fees with an annual nominal licence fee depending on the number of bedrooms or on the size of the property. Furthermore, a final withholding tax on any rental returns of say 10-12% should replace the current income tax requirements, and therefore a landlord will know that for every Lm100 of rental income he receives, he has to immediately deduct say Lm10-Lm12 in withholding tax. Although the government’s first reaction will probably be that this is a big decrease from the average 35% tax, due together with the annual tax returns, some basic calculations will show that a structure based on these proposals would be likely to bring in tax revenue on property rentals substantially higher than the present partial revenues declared by a few individuals.
Let us not drag on with these issues until we will eventually destroy this potential market and it’s substantial input to our economy. Or worse still, let us not, as has been the case in many other sectors, go from one extreme of laissez-faire to another of extreme and immediate taxation which will do nothing more than scare everyone into selling their investments and creating a panic in the market.

Ian Casolani is PRO for the Federation of Estate Agents

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