Following the go-ahead from the Planning Authority for the building of high-rise towers in Malta, the next item on the drawing-board is to discuss the financing of these large projects.
The main banks have their hands tied in many ways and there are onerous rules on concentration risks of collateral. They have also started showing signs of a diminishing appetite for further exponential growth in real estate exposure.
The developers will of course seek to part finance their projects by getting a number of deposits up-front, with people even willing to pay deposits not on the strength of a promise of sale agreement (konvenju), but also on the back of some loose expressions of interest, the legality of which seems rather tenuous.
Not before long, the developers will turn their attention to the issuance of bonds. While I would have no qualms if the bonds were to be sold to institutional investors or privately to a selected group of people, the likelihood is that the developers will issue bonds to the retail public and list them on the Malta Stock Exchange. This will no longer be a case of sporadic bond issuances by different companies in different sectors, but a seismic shift whereby a number of large real estate projects will require financing from the retail public at a time when the property market seems to be heating up. An intertwining weave of limestone, retail bonds and cement.
In a worst case scenario you have a potential property bubble being financed by the unwary saver looking for higher interest payments while not being aware of the risks involved.
It is the duty of the Listing Authority/Malta Financial Services Authority to intervene further in the case of bonds sold to the retail public which are linked to mega property projects. There are a number of ways how to do this, the technicalities of which are beyond the scope of this opinion. One option would be to impose a rule that such ‘mega real estate bonds’ which are sold to retail public investors (unlike for instance institutional investors) should have a credit rating issued by a licensed credit rating agency in the EU.
My final remarks relate to the proposed Malta Development Bank, as set out in Bill 164 of 2016. While this idea is a commendable one and intended to address a number of gaps in the banking industry, one does hope that this bank will not be used for such real estate towers, instead of, say hospitals, SMEs, roads, social housing and schools. Currently, the Bill provides that the bank shall give particular consideration to inter alia “large infrastructural projects”. This is a loose concept that should be tightened further on enactment of the Act, lest anyone thinks of the abominable idea of using taxpayers’ money to finance the towers.
The financing of Fawlty Towers is hardly comical material.