Unsustainable urban development

Unsustainable property speculation has been the main reason for the deterioration in this country in the last 40 years, in more ways than one. I fully agree with Mr Scicluna's assessment of the reasons for this sad state of affairs (May 30). However, what most speakers on the subject tend to miss is the very issue that underscores this seemingly insurmountable problem. Speculation is necessarily fuelled by financing.

Traditionally, financiers have considered property as the best security they could have. Unfortunately, financing decisions have for a long time been coloured by this perception. On their part, investors hold the opinion that property is the best investment because values hold. These two views may be correct in a market where demand exceeds supply and therefore sales and prices are firm and assured. But in the last 20 years the situation in the property market has become one of gross overcapacity.

Speculators and financiers still think we are riding the crest of an everlasting wave of success. Financiers should bear a large part of the responsibility for the present situation. They helped create an artificial market situation based on the misconception that with property you cannot go wrong. The truth is, however, that property has given both financiers and speculators a false sense of security. In a market such as ours, where supply far exceeds demand, the value of the security is lowest when you need it most.

When the chips are down, repayments on the loans stagnate, and the financier puts pressure on the developer to sell, the market value of the investment takes a nosedive. This is especially true in the case of commercial property; who in their right mind would buy a hotel when the market is depressed? What protection would a charge over such property afford a financier intent on recovering his money? Proof that sales expectations have been way too high is the custom of bartering that has become common in the last 10 years or so. Because sales take long to materialise, the developer settles dues to the contractor through a system of bartering an item of property. In the end, the property stock continues to swell, no cash ever changes hands, and the financier is left holding the bag with non-performing loans and overdrafts. Pressure by financiers on developers to liquidate property that they have been sitting on in the hope that prices will continue to rise, will help deflate the property price balloon and release cash back into the system.

Another issue is that of industry profitability. The property market in Malta is highly fragmented, with far too many players. The result is an overall reduction in profit margins. The bigger the competition, the lower the margins. With bartering becoming a common practice in the property industry, the problem continues to spiral out of control. The cliche that the construction industry is one of the pillars of the Maltese economy is unfortunately just that. It is an inward-looking attitude which encourages production for local consumption that does not translate into economic growth as would exports. On the contrary, it fuels imports of ancillary products and machinery.

I support Mr Scicluna's assertion that "the moral imperative now is that speculation should be discouraged". It is not only the government that should set the ball rolling, although undoubtedly it has the greatest responsibility in defining sensible, unambiguous, and sustainable parameters. I would add that the banking and financial sector should adopt a much more cautious attitude than was the practice in the past and to restrict their appetite for financing speculative projects.

Thankfully, it appears that this has started to happen in certain sectors. An initiative to put the brakes on property and land speculation is required in order to stem the damage that is being inflicted in such diverse areas as the environment, the economy, the industry itself, the quality of life, the availability of funds for other more beneficial projects that generate export income and growth, as well as to encourage investors to "think outside the box" and look for more innovative and long-term ways of investing their money.