Employment in the construction industry dropped by more than eight per cent in the September quarter, an indication of the sector’s protracted slowdown.

Figures released by the National Statistics Office yesterday show that in the third quarter, jobs, wages and hours worked in the construction sector dropped significantly when compared to the corresponding period of 2009.

Wages paid went down by 1.2 per cent and the number of hours worked declined by almost 10 per cent.

However, despite the bleak figures, new permits for residential buildings increased by more than four per cent in the third quarter. The increase was primarily due to buildings with two or more dwellings.

The construction industry’s sister activity, real estate, is also going through a sluggish patch with the International Monetary Fund this week pointing out that although property prices stabilised there still was excess supply in the market.

This is a source of concern, especially for the loan exposures banks have in real estate. In its country report, the IMF warned that Maltese banks were highly exposed to the real estate sector, echoing a similar observation made by Central Bank governor Michael Bonello.

Mr Bonello described the banking sector’s high exposure to real estate as “the first and obvious challenge” facing banks. “Although the bank business model was a source of strength during the global financial crisis since it allowed them to weather the storm, this is no reason to be complacent. The first and most obvious challenge is concentration risk in property loans and collateral held against property,” Mr Bonello said.

He pointed out that some of this risk had already materialised in the form of higher non-performing loans even though bank deposits exceeded loan exposures by 32 per cent.

Last month, Austrian bank Bawag called in a €42 million loan after Gemxija Crown Ltd defaulted on its payments. Gemxija are the developers of the Mistra Heights apartment project in Xemxija and the loan was used to buy the land. The project has not yet taken off the ground. Gemxija is jointly owned by a subsidiary of Kuwaiti real estate giant Al Massaleh and JPM Brothers.

“The credit risk carried by the banks arising from the relatively high concentration of loans to the property-related sectors and the need to ensure appropriate provisioning and strong capital buffers have been highlighted in successive publications of the Central Bank and in the governor’s speeches,” a spokesman for the Central Bank said when asked whether the IMF’s warning was a matter of concern.