Real estate: real issues
Even if construction were to stop tomorrow, enough housing units have been added in the past six years to cope with the normal demand resultingfrom the increase in the number of households - for at least the next 10 years.The remark was made by Joe...
Even if construction were to stop tomorrow, enough housing units have been added in the past six years to cope with the normal demand resulting
from the increase in the number of households - for at least the next 10 years.
The remark was made by Joe Falzon when speaking at a conference on property organised at the Portomaso Conference Centre last week by EMCS consultants.
The number of marriages every year has remained fairly stable at 2,300 with an additional 1,300 households being added every year. There are a few hundred separations to factor in, although these do not result in a corresponding increase in new households as new relationships form.
In spite of the flat demand curve, there were 10,400 permits issued last year by the Malta Environment and Planning Authority, bringing the total since 2000 up to 46,000.
The additional demand would therefore have to come from foreigners but Prof. Falzon said that demand from this sector had not grown sufficiently to take up the additional supply.
These crucial figures, however, are not available.
Since Malta joined the EU, citizens of member states do not require a permit to buy property and, somewhat surprisingly, no statistics are being compiled to monitor just how many have bought property. Specially designated areas like Portomaso are also exempt from permits.
The figures that are available from the Acquisition of Immovable Property permits are not encouraging. Sales to non-EU citizens have gone down, rising from 296 in 2000 to 695 in 2004 but since dropping to 399.
Demand and supply or supply and demand?
So will the demand be forthcoming?
One member of the audience summed it up succinctly: It was crazy to create an oversupply and then to try and create demand for it.
"We are simply doing things back to front," he said.
"Construction is a fairly low risk investment but you have to consider the opportunity cost to entrepreneurship that could otherwise have attracted those funds."
Why is so much investment going into property? It is not rocket science: House prices between 2000 and 2006 went up by 10.7 per cent while the Malta Stock Exchange went up by 6.9 per cent during the same period, as Prof. Falzon demonstrated.
In spite of these figures, the guests on the various panels took great pains to avoid the "four-letter" word - oversupply - and to explain why current and future stock levels should not put downward pressure on prices.
One important reason, as put forward by the president of the Federation of Estate Agents Malta, Douglas Salt, is that in spite of the number of permits issued, units would not be released at the same time.
"The focus should not be on the total number of units for which a permit has been released but on the number of units that will be released annually," he said.
"Demand has changed even domestically. The trend has been to move away from large houses that require a lot of cleaning and maintenance to lifestyle developments. With so many households having two working spouses, people simply do not have the time or inclination to look after a villa."
Overseas promotion and financing
He believes that foreigners are the solution but was clearly frustrated that so little has been done so far to promote Malta overseas.
As EMCS's Adrian Said pointed out, around 300,000 Britons own a second property overseas, and 198,000 moved abroad last year alone.
Mr Salt said that rental restrictions on foreign-owned property should be removed. With regards to prices, he cautioned developers against inflating prices - saying that this would inevitably lead to their having to drop them later on.
What could cause prices to fall? Developers would be under pressure to sell by repayment schedules - but banks have adopted a particularly prudent approach. While the purse strings have been opened for personal mortgages, they have been tightened for developers, who must now put up a considerable proportion of the value. As BOV's John Soler pointed out, only a small part of the bank's lending portfolio is real estate development, acknowledging that it is a "volatile" sector.
This has forced developers - especially those of large projects - to seek different forms of financing. Francis Vassallo, chairman of Bawag Bank (which is underwriting part of the GAP bond issue) said projects were now so large that they were beyond the scope of one bank. He called on banks to join up, pointing out that this also spread the risk, suggesting syndicated loans for smaller banks.
Mr Vassallo explained that large projects were usually highly geared, requiring careful project analysis as financing repayments depended so much on cash flow. This analysis, he said, depended on timing and hence, delays by Mepa in the issuing of permits could actually force a project into bankruptcy.
He was, however, sceptical about the existence of oversupply, saying that not all the empty apartments were actually for sale.
The situation is quite different when it comes to homes. HSBC's Godfrey Swain said analysis of the mortgage portfolio showed that only around 12 per cent of the population had to borrow over 80 per cent of the property value. Less than a quarter of the population has a loan, defaults are negligible and many loans are being repaid early.
Quality and prices
The outcome of the property market will depend increasingly on quality, many of the speakers stressed. Chamber of Architects representative David Felice, who was in the audience, did not mince his words: There was considerable room for improvement.
"Everyone here needs to take a piece of the blame, instead of everyone trying to blame someone else. Mepa needs to ask for the tools to enable it to benchmark projects. Developers and investors should focus on quality instead of going for cheap and fast developments. And architects need to say 'no' to projects that they do not believe in," he said, adding that half the architectural course graduates this year were not yet considered ready to be granted their warrants.
Easier said than done? Mepa representative Silvio Farrugia said the authority could only take decisions on the designs submitted - although it often suggested improvements. However, its attempts to emphasize quality were not always welcomed. Its White Paper on high-rise buildings suggested a floor-area minimum of 250 square metres. The feedback received from developers? That Mepa should consider lowering it to as little as 45 square metres! What about prices?
Europa Research and Consultancy Services economist Karl Montfort said the key to understanding price increases came from understanding that this was a differentiated market.
Earlier, conference organiser John Grech of EMCS had said it was important to bear in mind that the property market is in fact very fragmented and should not be seen as being one segment. He also warned that Malta's property market had to be seen in the context of what was happening in the sector in other countries.
Mr Montfort put forward three theories for recent price developments:
Prices reflect market fundamentals, such as income, low interest rates and demographic variables.
The market is temporarily overvalued and there would be a gradual readjustment through stable prices or small declines.
Prices are being driven by expectations of future prices, but noting that expectations become self-fulfilling while prices are vulnerable to expectations.
Opening the conference, Dr Grech said he hoped to stimulate debate. And yet, in spite of the accumulated wisdom of the panel speakers and the considerable audience, crucial questions about the sustainability of the current construction pace and the future of prices remained unanswered.
A snapshot of the construction industry
• 38.9 per cent of respondents to a BICC survey about the construction industry said they expected profits to drop in the coming six months.
• A record 21,506 people were employed in construction-related sectors in 2005.
• The sectoral contribution to GDP from construction increased from 3.49 per cent in 2000 to 4.06 per cent in 2005.
• The contribution from real estate, rental and business activities increased from 10.04 per cent to 12.23 per cent, although year-on-year growth slowed down significantly between 2004 and 2005.
• Although permits were issued for 46,000 properties between 2000 and 2006, only 25,000 new water connections were installed.
from the increase in the number of households - for at least the next 10 years.
The remark was made by Joe Falzon when speaking at a conference on property organised at the Portomaso Conference Centre last week by EMCS consultants.
The number of marriages every year has remained fairly stable at 2,300 with an additional 1,300 households being added every year. There are a few hundred separations to factor in, although these do not result in a corresponding increase in new households as new relationships form.
In spite of the flat demand curve, there were 10,400 permits issued last year by the Malta Environment and Planning Authority, bringing the total since 2000 up to 46,000.
The additional demand would therefore have to come from foreigners but Prof. Falzon said that demand from this sector had not grown sufficiently to take up the additional supply.
These crucial figures, however, are not available.
Since Malta joined the EU, citizens of member states do not require a permit to buy property and, somewhat surprisingly, no statistics are being compiled to monitor just how many have bought property. Specially designated areas like Portomaso are also exempt from permits.
The figures that are available from the Acquisition of Immovable Property permits are not encouraging. Sales to non-EU citizens have gone down, rising from 296 in 2000 to 695 in 2004 but since dropping to 399.
Demand and supply or supply and demand?
So will the demand be forthcoming?
One member of the audience summed it up succinctly: It was crazy to create an oversupply and then to try and create demand for it.
"We are simply doing things back to front," he said.
"Construction is a fairly low risk investment but you have to consider the opportunity cost to entrepreneurship that could otherwise have attracted those funds."
Why is so much investment going into property? It is not rocket science: House prices between 2000 and 2006 went up by 10.7 per cent while the Malta Stock Exchange went up by 6.9 per cent during the same period, as Prof. Falzon demonstrated.
In spite of these figures, the guests on the various panels took great pains to avoid the "four-letter" word - oversupply - and to explain why current and future stock levels should not put downward pressure on prices.
One important reason, as put forward by the president of the Federation of Estate Agents Malta, Douglas Salt, is that in spite of the number of permits issued, units would not be released at the same time.
"The focus should not be on the total number of units for which a permit has been released but on the number of units that will be released annually," he said.
"Demand has changed even domestically. The trend has been to move away from large houses that require a lot of cleaning and maintenance to lifestyle developments. With so many households having two working spouses, people simply do not have the time or inclination to look after a villa."
Overseas promotion and financing
He believes that foreigners are the solution but was clearly frustrated that so little has been done so far to promote Malta overseas.
As EMCS's Adrian Said pointed out, around 300,000 Britons own a second property overseas, and 198,000 moved abroad last year alone.
Mr Salt said that rental restrictions on foreign-owned property should be removed. With regards to prices, he cautioned developers against inflating prices - saying that this would inevitably lead to their having to drop them later on.
What could cause prices to fall? Developers would be under pressure to sell by repayment schedules - but banks have adopted a particularly prudent approach. While the purse strings have been opened for personal mortgages, they have been tightened for developers, who must now put up a considerable proportion of the value. As BOV's John Soler pointed out, only a small part of the bank's lending portfolio is real estate development, acknowledging that it is a "volatile" sector.
This has forced developers - especially those of large projects - to seek different forms of financing. Francis Vassallo, chairman of Bawag Bank (which is underwriting part of the GAP bond issue) said projects were now so large that they were beyond the scope of one bank. He called on banks to join up, pointing out that this also spread the risk, suggesting syndicated loans for smaller banks.
Mr Vassallo explained that large projects were usually highly geared, requiring careful project analysis as financing repayments depended so much on cash flow. This analysis, he said, depended on timing and hence, delays by Mepa in the issuing of permits could actually force a project into bankruptcy.
He was, however, sceptical about the existence of oversupply, saying that not all the empty apartments were actually for sale.
The situation is quite different when it comes to homes. HSBC's Godfrey Swain said analysis of the mortgage portfolio showed that only around 12 per cent of the population had to borrow over 80 per cent of the property value. Less than a quarter of the population has a loan, defaults are negligible and many loans are being repaid early.
Quality and prices
The outcome of the property market will depend increasingly on quality, many of the speakers stressed. Chamber of Architects representative David Felice, who was in the audience, did not mince his words: There was considerable room for improvement.
"Everyone here needs to take a piece of the blame, instead of everyone trying to blame someone else. Mepa needs to ask for the tools to enable it to benchmark projects. Developers and investors should focus on quality instead of going for cheap and fast developments. And architects need to say 'no' to projects that they do not believe in," he said, adding that half the architectural course graduates this year were not yet considered ready to be granted their warrants.
Easier said than done? Mepa representative Silvio Farrugia said the authority could only take decisions on the designs submitted - although it often suggested improvements. However, its attempts to emphasize quality were not always welcomed. Its White Paper on high-rise buildings suggested a floor-area minimum of 250 square metres. The feedback received from developers? That Mepa should consider lowering it to as little as 45 square metres! What about prices?
Europa Research and Consultancy Services economist Karl Montfort said the key to understanding price increases came from understanding that this was a differentiated market.
Earlier, conference organiser John Grech of EMCS had said it was important to bear in mind that the property market is in fact very fragmented and should not be seen as being one segment. He also warned that Malta's property market had to be seen in the context of what was happening in the sector in other countries.
Mr Montfort put forward three theories for recent price developments:
Prices reflect market fundamentals, such as income, low interest rates and demographic variables.
The market is temporarily overvalued and there would be a gradual readjustment through stable prices or small declines.
Prices are being driven by expectations of future prices, but noting that expectations become self-fulfilling while prices are vulnerable to expectations.
Opening the conference, Dr Grech said he hoped to stimulate debate. And yet, in spite of the accumulated wisdom of the panel speakers and the considerable audience, crucial questions about the sustainability of the current construction pace and the future of prices remained unanswered.
A snapshot of the construction industry
• 38.9 per cent of respondents to a BICC survey about the construction industry said they expected profits to drop in the coming six months.
• A record 21,506 people were employed in construction-related sectors in 2005.
• The sectoral contribution to GDP from construction increased from 3.49 per cent in 2000 to 4.06 per cent in 2005.
• The contribution from real estate, rental and business activities increased from 10.04 per cent to 12.23 per cent, although year-on-year growth slowed down significantly between 2004 and 2005.
• Although permits were issued for 46,000 properties between 2000 and 2006, only 25,000 new water connections were installed.