A property frenzy or an epiphany?

Many actors in the speculative building sector have been rubbishing warnings about an overpriced stock scenario but it is an open secret that they enjoy a strong lobby with Castille, in their drive to continue expanding their portfolios of luxury villas, hotels, shopping malls and commercial property. 

They engage trusted consultants to publish surveys which invariably show how resilient the property arm of the economyis. This ignores the fact that while it is a grand revenue generator by way of property taxes and PA licenses, as well as employing countless low-skilled TCN’s, yet its net contribution to GDP is minimal. 

Writing in the Times of Malta, the minister for economy opined that after adjusting for changes in prices during the period, one notes that all sectors bar construction increased their value added since 2019. Construction, which, if you were to go by what the local media says, is the main source of growth, has declined by 13%.  Real estate – the other supposed main economic sector – had the lowest growth rate out of all sectors (8%) unquote. 

Yet, as land is so scarce, many argue that the current trend of building higher units will beat the incidence of a drop in demand and a consequent slide in property prices. Local banks are also financing mega developments on the understanding that pollsters show no evidence of a property bubble which can burst leaving a significant correction in resale prices. A gentle bursting of the frenzy can lead to a rapid decline in property values, potentially resulting in financial losses for home owners, banks and investors.  

On a social aspect, the government is trying to fight a commonly held view that property prices are unscalable for low-income cohorts by having the Housing Authority subsidizing millions to build more affordable housing. The influx of foreign workers and the demand for renting of private accommodation from budget-conscious couples created the necessary demand that fuelled the exponential growth in supply. 

Yet, first-time buyers are facing an insurmountable escalation in prices. The price for a basic flat without a garage has shot up in value, depending on location, to reach €350,000 unfurnished. 

Malta’s strong banking sector has long been the country’s backbone, supporting the growth of various sectors. Capital buffers retained by local banks are among the highest in Europe, and banks have consistently returned solvency ratios that are almost double the EU average. All the same, it is a fact that elevated exposure to house loans (mortgages) and mega property development is becoming a prominent component of local bank loan portfolios. 

Observers frequently ask whether an assessment is made by ERA and PA to arrive at the true reckoning of demand for luxury villas/apartments and commercial properties as developers continue to rush submitting new permits. Their greed iscapitalizing on the gravy bandwagon - make hay while the sun shines.  

One must take note of the low fertility rate and an aging population which, in itself does not augur for erecting more expensive units. If an epiphany occurs, this oversupply can lead to a slowdown in construction activity and negatively impact employment within the sector. It is encouraging to note that 80% of residents own their property but there is an emerging trend that more are resorting to rent, due to the explosion in housing stock values. It stands to reason thathomeowners may feel less wealthy if property values decline, potentially leading to reduced consumer spending and a mild economic slowdown. 

Let us review some of the mega developments which have recently been approved by PA and ERA. The list is long, and not exhaustive. Here, one can mention the massive Villa Rosa project and the ITS site project in St George’s Bay, the Xuereb Tower and Mercury Towers in St Julian’s, Manuel Island city, 1000 new flats in Gozo, Town Square in Sliema,the Metropolis and the ST Tower in Gżira, Shoreline in SmartCity, the Mistra Village development, and the Quad in Mrieħel.  

Naturally, this list excludes many projects still under application which could be approved by the end of this year. One is looking at an additional 20,300sq.m of new restaurant/bar areas, an additional 60,700sq.m of new retail area, and an additional 89,000sq.m of new office areas. Regrettably, a future influx of multi-national companies attracted to bring their manufacturing base in Malta has not materialised post-Covid. 

Top estate agents have surreptitiously noticed that the amount of office space on the market has exceeded demand, and asa result, requested rents are falling. Add to this conundrum the direct investment by Castille in its own grandeur projects. A resounding example is a large, unfinished showroom in the periphery of Zejtun rented for a fixed term at an aggregate value of €25 million. This property saw the housing of a number of government-controlled agencies such as Finance Malta, Gaming Malta, the Companies house, a top audio and fully functional hall - ideal for public meetings. This shell form property cost another €11.5 million to refurbish. 

But, one asks, with government being a major land owner, why spend millions in buying third party commercial property? The Lands Authority itself is not super efficient.  Information is still held in “tens of thousands of files that have been accumulating over the past decades”. 

Let us be grateful for our jewel in the crown that is the walled city of Valletta, built in 1570 by the Knights of St. John who commissioned the top architect Laparelli to design and oversee its prolific baroque style palaces and fortifications.  These need continued attention and maintenance to retain their heritage value. 

Unfortunately, attempts to mold it into another Ibiza with all-night revelry, loud music till late and plastic coffee tables out in main streets... this should stop. 

In conclusion, a correction in the real estate market can have significant implications for future sustainability and the broader economy. There are myriad ways, how a glut can affect our GDP growth in Malta, which as a result of a lax planning attitude concerning the issue of building permits, does not accurately reflect future demand for such profligate developments.