Electoral ' freeze ' for property market

Malta’s foremost property agents say the euro changeover and the electoral campaign generated a slowdown in the property market, but the president of the estate agents’ federation says talk of a slowdown is ‘irresponsible’.

The property market has experienced a slowdown in the first two months of the year, sending alarm bells across the business community, MaltaToday can confirm.
Estate agents who spoke to this newspaper said the slowdown was mainly attributable to the electoral campaign, which was in earnest during the first two months of the year, culminating in the March 8 general election, as well as the introduction of the euro on January 1.
However, they said the pre-electoral freeze was defrosting and the property market was gradually returning to normal again. Asked about the slowdown, Douglas Salt of Frank Salt Real Estate said: “There was a slowdown in the residential property market in the last two weeks of the electoral campaign, but the market has now caught up again”.
He said the commercial property market was not affected by this temporary slowdown. “In addition, the letting market did not suffer from a slow-down either,” Salt said.
According to Salt, the rate at which the price of property rose has now stabilised at around 5% a year after reaching a peak of 15% a few months ago. “This is a natural correction of the market after sustaining a rally for so long,” Salt told MaltaToday.
Asked whether there was a glut in the property market as a result of the new properties that flooded the market recently, Salt said this was not the case.
“There are around 8,000 foreign work permit holders, mostly working in the e-gaming sector, who need to find accommodation. These people would usually choose to rent rather than buy property first. “Moreover, there was demand for the new ‘lifestyle projects’ such as Pender Gardens or Metropolis, with people selling their villas and moving into these new upmarket residence,” Salt told MaltaToday.
Alan Camilleri, CEO of Dhalia Group, said the first quarter of 2008 was characterised by both the euro changeover and the electoral campaign. 37“It’s not surprising that business sentiment slowed down during this period, and it is a natural reaction to uncertainty. Now that the water is under the bridge, the market is once again gathering momentum at a rapid pace.” Camilleri said the latest Central Bank Quarterly report provided the answer as to whether there is a slowdown in certain sectors. “According to the Central Bank, data for the last quarter of 2007 indicate that advertised residential property prices were almost unchanged on a year earlier. “Upmarket properties keep appreciating at a much higher level than shell-form maisonettes for example. This is where developers, planners, real estate agents and other stakeholders, including government, need to work together to ensure that there is an adequate supply mix which matches the demands, which demands change according to the emerging economic and social realties,” Camilleri said. He said its contribution to the country’s nominal GDP had largely remained the same over the past two years. “Although there is an absence of consolidated statistics on property sales, the quick uptake of large scale property developments shows that the market is still vibrant and healthy.” He also said Dahlia’s ‘discount’ sale advertised in this week’s papers was a one-off scheme intended to help first-time buyers: “We are not offering the properties at a discounted rate, but we have tied in together as well a discounted 5% interest rate on home loans from BOV, as well as discounts on furniture and appliances from Fino and Forestals.”
On his part, Trafford Busuttil, President of the Federation of Estate Agents (FEA), which represents 38 estate agents in Malta and Gozo, confirmed the property slump. “In my opinion the market is going through something very natural in the circumstances. One has to consider that the island has just changed over to the euro and just a few weeks ago we had a general election. Things are returning to normal and the market is picking up again.” Busuttil was however wary of using the term “slowdown” when asked by MaltaToday to confirm the slump.
“In my opinion, this is not a slowdown but a temporary lull we always experience during and slightly after election time. At this moment in time it is extremely premature and irresponsible to talk of a slowdown, and in my opinion we are misinterpreting a marketing campaign presented by one of the leading players in the market as the start of a slow down in the market,” he said, with obvious reference to Dhalia’s property sale. “The company that presented this package is following a marketing strategy to boost it revenue. I must stress this is not the situation all our other members are experiencing. I can safely state that market value properties sell in record time, and it is here that we have to educate the home owners, in that they have to have professionals value their property and not just place a price tag of what in their opinion it would fetch on the market.
“The local property market is still very active and if the past is a reflection of the future then we are looking at a very exciting future,” Busuttil said.
He also disagreed there is actually a property glut on the market. “If one had to analyse the 2005 Census, in relation to property, the number of vacant property is much lower than stated. The reasons being that many of the so-called ‘vacant properties’ are either holiday homes or properties that are being rented out to local and overseas nationals. “To give you an idea, there are 8,000 work permits issued to foreign nationals, which by natural deduction rent property on the island. For instance in Ghasri, Gozo, the Census states that there are 200 vacant dwellings, when we all know the size of this village, with a total population of 418 people. Therefore it is safe to state that the so called ‘vacant properties’ are not vacant at all but owned by Maltese and foreigners as holiday homes.
“Looking at the census closely one can find this trend in all the traditional rental ‘hotspots’, Busuttil told MaltaToday. “Apart from the above one must also take into consideration the large number of properties that are in dispute.”

Market Value Properties 'selling fast' - Times of Malta 20th November 2008

Market value properties are "selling fast" and the higher end sector is "extremely vibrant" in the current climate, but industry must be competitive enough to grasp present opportunities, according to the president of the Federation of Estate Agents.

"When looking at the market, it is very important to segment it," Trafford Busuttil told The Times Business. "The upper end of the market is extremely vibrant and a leading development launched a new phase recently, selling €27 million-plus in a few weeks. That is far from a downturn."

Mr Busuttil, who has also just been re-elected chairman of the Real Estate Trade Section of the Malta Chamber of Commerce and Enterprise, admits that supply outweighs demand at the lower end of the market, "but market value properties are selling, and selling fast - in today's market, and it is even more important to seek professional advice as this might save a client thousands."

Despite discouraging prospects for Europe and arguably for Malta, Mr Busuttil believes there is an opportunity ripe for the taking if the market is competitive enough."

What is happening in Europe is an opportunity for us, if we introduce the necessary incentives to attract investors towards the local property market," he points out."

This industry must be made competitive if it is to succeed and thrive. Some three million British nationals are likely to be tempted to invest in property overseas within the next two years as economic conditions in the UK make strong returns from domestic investments less plausible, according to research by Carter Allen Private Bank, a Banco Santander subsidiary."

If the necessary measures are not taken, then, yes, we will see a drop in foreign buyers."

Mr Busuttil, who says lower interest rates are "definitely a breath of fresh air", is unconvinced that there will be up to 50,000 vacant properties in five years as has been rumoured. Not all vacant properties are up for sale as some may be tied up in court or family disputes or rented to foreign clients."

One must agree that no matter the figure, vacant property is a resource that is not being used," Mr Busuttil says. "The Real Estate Trade Section of the Chamber of Commerce is totally against taxing vacant property but in favour of fiscal incentives to entice property owners to place their property on the market."

As the outlook on the financial markets over the next few months is bleak, property remains a sound investment. Unlike investments on the stock exchange which require a 100 per cent upfront payment and a prayer, only 10 per cent was necessary outright when investing in the property market with the remainder financed by a mortgage."There is no other investment that offers the leverage that the property market offers," Mr Busuttil says.

Formation of the New Committee of the Real Estate Trade Section - Federation of Estate Agents

Mr Trafford Busuttil was elected Chairman of the Real Estate Trade Section of the Malta Chamber of Commerce and Enterprise for 2009 during the first meeting of the executive committee held on the 14tn of November. This meeting followed the Annual General Meeting of the Trade Section which was held on the 5th of November. The committee is further composed by Mr Joseph Sullivan Vice Chairman, Mr Steve Sant Fournier Honorary Secretary, Mr Ian Casolani, Mr Alan Camilleri and Mr Douglas Salt as Committee Members. Mr Joe Mercieca was also nominated to represent the Gozo sub-committee. The same committee will also take care of the Federation of Estate Agents Council which will be presided by Mr Busuttil as well.

On being elected, Mr Busuttil stated 'that the current situation prevailing internationally presents an opportunity for the local property market, in actual fact what is happening in Europe could be turned into an opportunity for us, if the local property market can be made more attractive to foreign investors. This industry must be rendered competitive if it is to succeed and thrive. According to recent research conducted by Carter Allen Private Bank, a subsidiary of Banco Santander, some three million British nationals are likely to be tempted to invest in property overseas within the next two years as economic conditions in the United Kingdom make strong returns from domestic investments less plausible.

Why is the Maltese Property Market unique?

To put the heading of this article into perspective we have to take a very brief look at other international property destinations. The main difference between Malta and all other countries, except for Singapore, is size. One must appreciate that although we live on a beautiful island, the archipelago is only 27 km by 14.5km with a population of approximately 400,000, not taking into account the doubling of the figure during the peak tourist months; making us the most densely populated country in the E.U. and second on the world ranking.

The natural question to ask is how does this make us unique? The answer is Land – or may I say the lack of it; land in Malta is at a premium. Let us imagine for one minute that someone took the pains of listing and numbering all the available plots of land on a sheet of paper. Now every time a plot is sold we will erase one from the list, without replacing it, this would leave us with a dwindling list and subsequently with a dwindling resource. In reality this is what’s happening and solutions need to be found, as this is the major contributor that fuels the growth in property prices.

The situation in other countries is different. Due to their size, land availability is not a major issue, meaning that property prices can be stabilised and indirectly controlled by increasing the size of planning belts. However, this does not mean that our situation is so dire that we cannot think outside the box and actively search for solutions on how to put this finite resource to better use.

The more obvious of then all is vertical growth; this would appear to be the solution. On the other hand, we must be very careful not to destroy the character and uniqueness of the Maltese islands. Please do not get me wrong, I believe whole heartedly in vertical growth, as long as it is restricted to specific areas and that the island will not be turned into another Manhattan. The main reason behind my trend of thought is that there are a large number of cities dotted with sky scrappers but only one jewel in the Mediterranean by the name of Malta. Personally I think we should utilise the resources we have, put vacant property to better use and offer fiscal incentives to property owners and clients to take up residence in designated towns and villages that need regeneration.

Another option is land reclamation; on this subject there are those that would argue that since we are an island that is the only way to go, whereas others will adamantly insist that this will ruin the topography of the islands. Both schools of thought have valid points, and it is of course a most difficult exercise to strike a balance between the economic growth of the country and the preservation of the environment.

Just like any other market, the driving force behind the residential property market is demand. This is fuelled by approximately 2500 marriages annually, possibly an equal number of separation, foreigners moving over, investments into holiday homes and purchases for rental use. Bring the total number of transactions annually to approximately 10,000. This figure is significant since it is a clear indicator that the Maltese property market is extremely active and more importantly, that it enjoys a very strong home grown market. With 77% of the population living in home owned property and a substantially high second home (holiday home) ownership. It seems that for us Maltese the logical way to go is to live in a home owned property, unlike many of our European neighbours. Living in an owned property not only gives people a sense of security, but is rendered easier here in Malta by the fact that local banks finance up to 90% of the value of the property. By natural deduction I would say that it would make monetary sense to invest in your own property rather than pay a monthly rent to a landlord. When you pay a monthly rent the only benefit achieved is that of having a roof over your head, whereas investing a similar amount in a property of your own could bring along greater security and capital growth, being the increase in value from the purchase price to the eventual selling price.

Next week we will take a closer look at the various taxes imposed on the property industry and how these effect pricing.

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

Taxation in the Property Market

This week my intention is to take a closer look at the various taxes imposed on the property market. Since 1992 the property market has been continuously burdened with new taxes. Even worse, fiscal systems have changed and been constantly amended. All this has left a significant impact on the price of property.

The tax measures involved are primarily these: Transfer Tax, Capital Gains Tax, Final Withholding Tax, VAT and the Tax on the sale of Inherited properties. All the above are always payable except for certain exemptions applicable.

The first fiscal measure we will look into is Transfer Tax (commonly referred to a as Stamp Duty, since in days gone by postage stamps were affixed to a contract as proof of payment). This is a tax which is imposed on every transaction and is payable by the purchaser. The only exemption applicable relates to inter company transactions, and this under stringent conditions. However, there are certain deductions applicable to people acquiring their sole primary residence, being:

i. 3.5% on the first € 116,500 and 5% thereafter.

Example:
Purchase price € 128,115
€ 116,500 @ 3.5 % = € 4077.50
€ 11647 @ 5% = € 582
Total: € 4659.5

In all other cases, the tax payable is 5% of the total purchase price.

Example:
Purchase price € 140,000
€ 140,000 @ 5 % = € 7000
Total: € 7000.

Capital Gains Tax introduced in 1992 and amended in 2005, is a tax always bourne by the seller. People who have owned and resided in their sole primary residence for a period exceeding 3 years are exempt from paying this tax. In all other cases, the following applies:

Properties inherited prior to the 25th of November 1992 pay a final withholding tax of 7% on the selling price.
Properties inherited after 24th of November 1992 are liable to a 12% tax on the difference in value between the value declared on Causa Mortis (deceased estate declaration) and the selling price.
Second properties and anyone selling their sole primary residence prior to the 3 year period, can either opt for the capital gains system or pay a final withholding tax of 12%, the option being only applicable for the first five years of ownership, after which the final withholding tax applies.

The capital gains tax system works in the following manner: On contract the vendor will be charged a 7% provisional tax, then one would have to produce a tax computation in their income tax return of the following year, indicating: the original purchase price, less any structural and amelioration expenses incurred in the property (receipts would be required, if after 1995 these have to be fiscal receipts) stamp duty and notarial fees paid, etc.,

The results of the above should be deducted from the selling price leaving the profit. This profit has to be declared as income in the following year’s return and taxed at the appropriate rate, less the amount of provisional tax already paid on contract.

Example:
Selling Price € 186,350

7% Provisional tax paid on contract = € 13,044

A- List of expenses
Purchase Price € 116,500
Works from Shell to finish € 18,635
Stamp duty € 9317
Notarial fees € 2329
Total: €146,781

Selling price: € 186,350
Total expenses A € 146,781
€ 39,569 profit x 35% tax = € 13,849 less 7% provisional tax already paid € 13,044 = Balance of tax due = €805.

The above is only a very simple explanation of how the system operates and professional advice should be sought.

The last tax that has a weighing on property value is VAT. Now the reader must be wondering, how VAT could possibly be a burden, if it is reclaimable? The answer is that VAT cannot be reclaimed by developers, so that the 18% VAT payable on any construction material or service becomes a cost and is therefore reflected in the final property price.

Now that we have looked at the various taxes involved let us take a quick look at the effect they have on the property market. Developer X decides to purchase a plot of land for € 200,000 from a family who inherited the property in 1990, what is the government’s share on transfer: € 10,000 from the developer and €14,000 from the sellers, for the grand total of € 24,000 or 12% of the value of the transaction.

The developer constructs the plot and spends € 150,000 in masonry works and finishes, thus paying 18% VAT, equivalent to € 27,000, which as stated earlier are not reclaimable and therefore added as a cost. So far our tax bill is € 51,000, equivalent to 14.57% of the investment.

Investors place their properties on the market for sale on the 5th year, due to the delays inherent in obtaining planning permission etc., meaning that he has no other option but to incur the 12% withholding tax. Let us say that the market value of the project is € 500,000 for argument’s sake. This will equate to € 60,000 in final withholding tax, which will further equate to a total tax liability of € 111,000 or 22.2% of the project value.

Any further comments on the above are superfluous as the figures speak for themselves.

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

Is Malta part of the Mediteranean Property Market ?

Malta is not the only property destination in the Mediterranean. Geographically Malta is in the centre of the Mediterranean but definitely it’s not the centre of the Mediterranean property market.

We are talking of an extremely competitive market with a number of countries vying to attract the largest number of overseas investors, knowing that this creates a multiplier effect.

A clear indication of this may be obtained from data concerning purchases of real estate abroad by UK citizens complied by the Association of International Property Professionals (AIPP). In 2007 UK citizens invested in 242,000 properties overseas worth €32.8 billion. The table below shows the distribution of these purchases by country.

Click on image to enlarge

Seven out of the top ten favoured property destinations are Mediterranean countries or have a coastline on the Mediterranean, attracting 143,990 transactions, valued at €19.6 billion, with Malta barely snatching 500 transactions annually, valued at €68 million or 0.36%. Some might argue that the €68 million we are attracting is sufficient for a small island like ours, but my question is what is Cyprus doing to attract 7,018 transactions valued at approximately € 954 million?

What do these destinations have to offer that we don’t? Do they have a nicer country? Is their sun brighter than that in Malta? Are their people more hospitable? Are they more English speaking? Are their medical facilities better than the ones found locally? Or is it the case that their tax legislation is designed to entice overseas investment?


Click on image to enlarge


The table above clearly spells out the reason why overseas investors seek pastures greener. In general, capital gains taxation on real estate in Malta is less attractive compared to that of other countries, due to its coverage, tax rate and the incentive to retain property as described above. In Italy for example, all real estate sold after a period of five years of ownership is exempt from capital gains tax, with normal rates of income tax being otherwise applicable.

The need to reform the system of capital gains taxation in Malta, to render our market a more attractive destination for international real estate business, it is fairly obvious from even a casual examination of the comparative table assembled higher up. Such reform could take the shape of a flat 15% capital gains tax on realized profits emanating from real estate transactions, if Malta is to be rendered competitive with other countries around the Mediterranean littoral.

A measure of this nature would stimulate activity in the property sector and enhance affordability for both local and international buyers. As with other sectors of the economy, competitiveness is the name of the game.

The figures in the comparative table state their own case and Malta must shrug off its insular mentality when it comes to property. This industry must be rendered competitive if it is to succeed and thrive, and it must be rendered competitive here and now, if one reckons that some three million British nationals are likely to be tempted to invest in property overseas within the next two years as economic conditions in the United Kingdom make strong returns from domestic investments less plausible, according to recent research conducted by Carter Allen Private Bank, a subsidiary of Banco Santander.

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

Is It The Right Time To Invest In Property?

From an investment perspective, property is an investors dream. If we are to invest our money in shares then we will have to finance 100% of our investment up front and hope that the market performs. If we are risk adverse, then we would opt for bonds having a reasonable rate of return, however we would still have to finance 100% of our investment up front. On the contrary if we are to invest in property, we would generally finance 10% of the value of the property with the remaining balance financed through a bank loan.

If we are to purchase 10,000 shares in company X at € 10 per share, then we would have to pay € 100,000 on the date of purchase. The same goes for bonds. Whereas, if we are to invest in a € 100,000 property, our capital outlay is only € 10,000 since the other € 90,000 is financed by means of a bank loan. Within the industry this is referred to as ‘leverage’.

There is no other investment vehicle that places an investor in the same favourable position that the property market does. Why? Which other investment can we think of allows us to invest now and pay later? Which other investment finances it’s own way? In the case of property we can rent out the premises and with the income generated, we can finance the monthly mortgage payments. If this business model is utilised, which other investment allows us to invest 10% and achieve 100% ownership, have a handsome rental income pay off the loan and get a single or double digit percentage capital appreciation per year? This is only available through wise investment in property.

Over the past 30 years, the annual average returns on Real Estate investments worldwide have been 15.6% as against 12.3% for Equities, 8.5% for Bonds and 6% for cash. This is further proof that property is a safe and secure investment. It is a tangible product which we can physically see, touch, enjoy and most important of all, control. Other investments are held and managed by third parties.

The current international market situation is an ideal time to invest. Interest rates are on a downward trend - with the European Central Bank lowering it’s base rate by 1% so far - prices are corrective, rental returns have never been better and local banks are still very willing to finance property purchases. Today’s market is an incredible investment opportunity for the savvy investor.

If we had to look beyond our shores, the international property market is split into different categories - Established Markets such as Monaco, UK, Italy, France, Spain etc ; Rising Markets such as Malta, Dubai, Abu Dhabi, Morocco, Egypt etc ; Emerging Markets such as China, Brazil, Moldova etc and Emerging Markets in a an Established Environment such as Sicily, Eastern Algarve in Portugal etc.

All these markets provide different investment opportunities and risk levels. If we had to invest in an Established Market, property prices are higher, rental returns would range between 4%-6% and capital growth is a single digit percentage due to the secure nature of the investment. Rising Markets are those property hot spots that offer the perfect entry level on a capital appreciation graph. They are at an optimum position for investment since they are on the way to becoming Established Markets. Property prices are affordable, offering excellent rental returns and stable capital growth percentages. Emerging markets offer lower property prices, reasonable rental returns depending on tourism numbers and high capital appreciation, however they are not proven markets and investments would take a number of years to mature.

When thinking of which market to invest in we must arrive to certain conclusions:
What is the risk level we are prepared to take? Why are we investing in a particular country? Which part of the chosen country are we going to invest in? Are we looking at capital growth or rental returns or both?

The answers to the above questions vary according to the individual but the vision is common to many, namely, that of investing in a product that ( if researched and studied ) will not only provide enjoyment for the family and friends but also provide a source of income and a means of planning for the future.

For example, let us look at Dubai, the tiny Emirate in the Middle East that everyone is talking about. It is fair to assume that if any Capital City in Europe were even attempting to build the amount of property that Dubai is currently constructing, it would cause something close to mass hysteria. The Emirate’s 1.4 million population is set to grow by 8% year on year, equivalent to 112,000 people moving to the Emirate per annum. This year only, rents have increased by 10% and property prices were up by 5-10%. A growing population, an increase in foreign direct investment, an increase in office rentals, an increase in residential rentals, an increase in people moving to the city all present the perfect ingredients for success for the Real Estate investor.

No matter the nature of the purchase, one essential ingredient to a successful outcome to any property transaction, is what is known within the industry as an ‘Exit Strategy’. This is essential, no matter where we invest. It is extremely important to know that the country and area where we are investing has what is known as a home grown property market, meaning that property sales are not solely dependent on overseas purchasers but locals are actively involved in that market.

Trafford Busuttil
November 2008