The apparent discrepancy between the consultants’ valuation of the former ITS land in St George’s Bay and figures quoted in the media was down to the fact that it is a mixed use development project, with only about one-fifth of the footprint earmarked for residential and office use, according to Deloitte partner Raphael Aloisio.

Deloitte was brought in as consultants by the government after one bid was received for the site, from the City Centre consortium, which includes SD Holdings, Seaport Franchising and the Seabank Hotel.

Seaport Franchising is the operator of the Hard Rock Café franchise in Malta, which plans to have a 371-room hotel operate under this brand.

Sources said the original bid was for €17 million, of which €6 million was to be paid as a premium and €11 million for conversion and redemption of ground rents. However, the Deloitte valuation set the value at €56 million, which has, nevertheless, been criticised with Partit Demokratiku leader Marlene Farrugia saying it should be closer to €200 million and real estate agents telling The Business Observer “these kind of deals are anti-competitive and will definitely deter foreign investors from coming here”.

Mr Aloisio said the bid had been accompanied by a detailed business plan drawn up by another of the Big Four firms, which prepared detailed financial projections for each of the three activities on the site: two towers with 200 units, a mall and the hotel.

Deloitte came up with dramatically different values for the land allocated for the three separate activities: €1,250 per square metre of net developable area for the residential units (total value of €44.9 million); €325 per square metre for the gross developable area for the commercial activity (total value of €8.7 million); and €50 per square metre for the gross developable are for the hotel (total value of €2.5 million).

The valuation of the towers is based on the assumption that the development will have 36,000 square metres of net developable area and that only 1,770 square metres of the 25,000-square-metre site would be occupied by the towers, with roughly a further 3,600 square metres being allowed as the ‘public area’, which enables the developer to build more storeys.

The residential units will initially be subject to a ground rent of €1.170 million per annum, higher than any other similar development. Individual residents will have the right to redeem the ground rent at five per cent of the proportionate share of the ground rent, Mr Aloisio said.

Deloitte confirmed that the concessionaire is projecting to invest in excess of €220 million for the development itself, €56 million for the land concession and about €30 million for interest and other acquisition and project costs

“So the value of the residential part is for 1,770 square metres of built-up footprint on a larger site of approximately 5,300 square metres, which works out to €8,500 per square metre. But it is totally incorrect to apply the same calculation for the rest of the site, which is what Dr Farrugia seems to have done. The €8,500 per square metre is actually very much in line with what is being quoted as the value of land in Paceville but there you are talking about the value for purely residential use,” he pointed out.

Mr Aloisio said that, in their workings, they assumed that the apartments would sell for between €4,000 and €9,000 per square metre of gross floor area, which is in line with current rates and that the value attributed to the towers would increase if the eventual permits were to approve an increased developable area for residential and office use within the towers.

The present ITS site in st julian’s. Photo: Matthew MirabelliThe present ITS site in st julian’s. Photo: Matthew Mirabelli

With regard to the hotel, the bidder’s projections were fairly aggressive, he continued, assuming a higher room rate and gross operating profit than any other hotel in Malta at present. Given the perceived risk, €80 million cost of development and associated interest, revenue per room and the fact that the concession has a restricted use and is for a non-redeemable 99-year term, Deloitte put the value at €2.5 million (using a discounted cash valuation model).

“I appreciate that other hoteliers may argue that they paid more to acquire private land but there is a key factor that should not be overlooked, apart from the 99-year lease and the restrictive use. For the first time in a contract of this type, there is an obligation on the concessionaire to pay a pre-determined uplift in value between the hotel value and the residential value if they manage to negotiate a change of use. And that rate is indexed over the years,” Mr Aloisio noted.

The same limitation on change of use applies to the commercial section –which is more or less the same size as The Point – that traditionally gives recurrent income, rather than a lump sum. This was valued by Deloitte at €8.7 million, giving a total for the whole site of €56 million.

He pointed out that, for the commercial footprint and the hotel, the developer would be paying an annual ground rent of €390,000, which, Mr Aloisio said, was “considerably higher” than any similar development on government land.

Deloitte confirmed that the concessionaire is projecting to invest in excess of €220 million for the development itself, €56 million for the land concession and about €30 million for interest and other acquisition and project costs.

If for illustrative purposes one were to consider the position of the concessionaire if he were to sell the whole project once completed (say within five years), he would probably be able to get in the region of €400 million, and once his costs and taxes were deducted, he would end up with €75 million as developer’s profit, a 25 per cent return – or five per cent per annum.

Mr Aloisio said that this was lower than the return of 30-35 per cent that would be typically expected for similar projects.

There is, of course, one other important aspect to the deal: the credit terms, which will allow the consortium to pay a premium of €15 million for the site, the remainder coming from conversion and redemptions and ground rents.

Mr Aloisio indicated that the terms of payment afforded were not dissimilar to those given to similar projects in the past and that it would be incorrect to assume that the developer would not have to discount the apartment selling price if the obligation to redeem is to be absorbed by the buyer.

But sources in the real estate world, insisting on anonymity, were much more equivocal: “The ground rents and redemptions will be paid by the end user. Eight years interest free payment reduces the amount the consortium will pay to next to nothing. This will create an adverse effect on all investments in the surrounding area, give rise to conflict between developers, question the credibility of Deloitte and the credibility of the government for purposely creating an uneven playing ground.”

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