There is much being said about the Maltese property market – There are those that are spelling doom, others taking a more cautious approach and those that are totally upbeat and see a great future in the market. Which view is the correct one?
Over the coming weeks a number of articles will be published and at the end of this period you will be the one to make this decision. Whatever anyone writes is immaterial especially when they are discussing about your Home, for many our largest single investment, it has to be you, the reader, to digest what you read and decide with an open mind on the future of your investment.
One myth that must be clarified is that the property market is immune to any illness, no coughs, no colds, since it’s been so healthy for so many years. A perfect analogy to the situation is that of a child that is rarely sick and as soon as he catches a cold, the parents start thinking that the child is living the last few days of his life. Coughs, colds and bouts of flu are important in the development of us humans and the same goes with the market – Nothing can continue growing and growing without taking a short rest.
Now let us take an in depth look at this market of ours. It seems that whenever, one wants to become rich, the first business that comes to mind is property. The property market is profitable for those that know how it works, but very hard on those that look at it in the short term and do not understand it’s mechanics.
Over the past few years, it seems that the majority of Maltese with disposable funds became developers. Why? They saw the market doing exceptionally well and thought that the only way for this industry was up. However, people failed to understand that the market they were investing in was also fuelled by a number of fiscal amnesties, in particular two overseas fund repatriations and another amnesty on cash funds held at home. A large portion of these funds found themselves into the market, since the island is extremely limited in the investments it offers and above all because the property market is a safe market. This was a spiked period and it was obvious that things were going back to pre boom levels, which in fact happened.
So far we should all be in agreement. These investors gobbled up any site available for sale at any price. Now to understand this statement below find a brief explanation in point form, how to calculate a site’s profitability or otherwise:
Cost of site divided by the allowable number of floors and units, this will give you a price per airspace.
This airspace price is critical, being the cost of the prime raw material.
Add construction and finishing costs, which are set to increase dramatically over the next period. This being primarily driven by the soaring cost of oil.
Add your planning costs, Bank interest, road and drainage contribution, selling fees, etc.,
Add a reasonable profit margin and you have your selling price
So as we can see the costing of property is just the same as any other commodity, there is nothing different.
Now based on the above, let us imagine, for one minute, two importers of tuna, importing the same quality of tuna, having the same weight. If importer A purchased his supply at X% above that of B, it is obvious that the selling price of A will be higher than that of B. Finally the consumer will judge which product to purchase.
The property market works in precisely the same way. Those that purchased land on the high side have to correct their prices to market value, if they want to sell, since no one is going to invest in something that is over current market value. Market value properties always sold well and will continue to sell well. One might argue that they can hold onto the property, which they can, however, please keep in mind inflation and Bank interest.
Now to add an ingredient to our recipe, in 2005, MEPA revised it’s regulations to allow an additional floor in many localities. Using the same criteria used above and removing the cost of airspace from the equation and we are left with properties priced below market value. This is not because the market slumped but for the simple reason that the cost of one of the main raw materials was substantially lower.
The conclusion to the above is that we are going through a corrective market, which is extremely healthy and profitable for those that take this opportunity, especially when one considers that the rental market is extremely active and vibrant. Critics will say ‘ It obvious, Trafford, is going to talk this way, he runs an estate agency’. For those that know me my ethics and professionalism are not negotiable. Any statement I make is because I truly believe in it and in my next article I will show you, the reader, why.
Trafford Busuttil
Chairman of the Real Estate Trade Section – Malta Chamber of Commerce
President of the Federation of Estate Agents
Managing Director of Propertyline International
Over the coming weeks a number of articles will be published and at the end of this period you will be the one to make this decision. Whatever anyone writes is immaterial especially when they are discussing about your Home, for many our largest single investment, it has to be you, the reader, to digest what you read and decide with an open mind on the future of your investment.
One myth that must be clarified is that the property market is immune to any illness, no coughs, no colds, since it’s been so healthy for so many years. A perfect analogy to the situation is that of a child that is rarely sick and as soon as he catches a cold, the parents start thinking that the child is living the last few days of his life. Coughs, colds and bouts of flu are important in the development of us humans and the same goes with the market – Nothing can continue growing and growing without taking a short rest.
Now let us take an in depth look at this market of ours. It seems that whenever, one wants to become rich, the first business that comes to mind is property. The property market is profitable for those that know how it works, but very hard on those that look at it in the short term and do not understand it’s mechanics.
Over the past few years, it seems that the majority of Maltese with disposable funds became developers. Why? They saw the market doing exceptionally well and thought that the only way for this industry was up. However, people failed to understand that the market they were investing in was also fuelled by a number of fiscal amnesties, in particular two overseas fund repatriations and another amnesty on cash funds held at home. A large portion of these funds found themselves into the market, since the island is extremely limited in the investments it offers and above all because the property market is a safe market. This was a spiked period and it was obvious that things were going back to pre boom levels, which in fact happened.
So far we should all be in agreement. These investors gobbled up any site available for sale at any price. Now to understand this statement below find a brief explanation in point form, how to calculate a site’s profitability or otherwise:
Cost of site divided by the allowable number of floors and units, this will give you a price per airspace.
This airspace price is critical, being the cost of the prime raw material.
Add construction and finishing costs, which are set to increase dramatically over the next period. This being primarily driven by the soaring cost of oil.
Add your planning costs, Bank interest, road and drainage contribution, selling fees, etc.,
Add a reasonable profit margin and you have your selling price
So as we can see the costing of property is just the same as any other commodity, there is nothing different.
Now based on the above, let us imagine, for one minute, two importers of tuna, importing the same quality of tuna, having the same weight. If importer A purchased his supply at X% above that of B, it is obvious that the selling price of A will be higher than that of B. Finally the consumer will judge which product to purchase.
The property market works in precisely the same way. Those that purchased land on the high side have to correct their prices to market value, if they want to sell, since no one is going to invest in something that is over current market value. Market value properties always sold well and will continue to sell well. One might argue that they can hold onto the property, which they can, however, please keep in mind inflation and Bank interest.
Now to add an ingredient to our recipe, in 2005, MEPA revised it’s regulations to allow an additional floor in many localities. Using the same criteria used above and removing the cost of airspace from the equation and we are left with properties priced below market value. This is not because the market slumped but for the simple reason that the cost of one of the main raw materials was substantially lower.
The conclusion to the above is that we are going through a corrective market, which is extremely healthy and profitable for those that take this opportunity, especially when one considers that the rental market is extremely active and vibrant. Critics will say ‘ It obvious, Trafford, is going to talk this way, he runs an estate agency’. For those that know me my ethics and professionalism are not negotiable. Any statement I make is because I truly believe in it and in my next article I will show you, the reader, why.
Trafford Busuttil
Chairman of the Real Estate Trade Section – Malta Chamber of Commerce
President of the Federation of Estate Agents
Managing Director of Propertyline International
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