NEWS | Wednesday, 11 June 2008

Marketing Malta’s Real Estate offer

Dhalia Group Chairman Alan Camilleri’s speech at the Real Estate Forum held last week

At the outset, I wish to place my contribution in the context of myself possibly being the lastest entrant into the real estate sector after a rather longish experience in government. So rather than speaking from the pulpit, my thoughts are more the result of my observations and reflections from the street.
Like any other industry, we need to understand where we have come from, where we are now and then put our minds together to articulate our way forward. Like any other economy, Malta’s economy has seen dramatic changes and shifts over the past few years and real estate – which goes hand in hand with the movements of the construction industry – is also transforming itself rapidly. One would need to study the scale of this change. Are the fundamentals of economic behaviour in the real estate market changing or are we just experiencing a presentational change?
Inexpensive land, low cost of material and labour, excess liquidity and an infrastructure crying out for growth rendered double digit investment returns and soaring house prices which made Malta an attractive property investment site.
Competition caught up with us over the past few years while membership into the European Union and lately the euro have delivered totally different platform for making business abroad and in attracting foreign direct investment.
We are now living a very interesting economic phase. Looking at the big picture, I beleive that we need to seriously consider the impact of a number of macro-economic factors on real estate in general. Regrettably, it is not yet possible to have consolidated statistics on the property market in Malta. The little research available is not sufficient to guide the policy makers, investors, developers and operators leading to a confused and at times piecemeal policy decisions, gut-feeling investment decisions, misguided real estate development approaches and short-term pitches by the real estate agents. I therefore believe it is the right time for the National Statistics Office to seriously consider a more detailed study on the property market and publish sector specific statistics on the basis of a regulated process of information submission by ourselves and others as operators and service providers in the field. As Dhalia we are committed to this approach since we strongly believe that such information would help all the stakeholders to create and then market a better real estate product than we have today.
In the absence of this however, allow me to mention a few matters which are surely having their impact to a greater or lesser extent on our business.
The first is the global economic slump. While thankfully Malta has so far been saved the tumbles of the financial and housing markets in the US and Britain as well as Ireland and Spain, we are not immune to the turmoil in the financial and equity market. For real estate, this can render positive results since investment in property in Malta can yield better returns than those currently being provided by the share and bond markets locally and abroad. On the other hand, credit growth related to property purchases is still experiencing rapid increases of an average of 12 per cent per year, while credit facilities for real estate development grew by 23.5 per cent in 2006 and 14.8 per cent in 2007 according to the latest quarterly review published by the Central Bank of Malta. Thankfully, this robust expansion in credit has not been matched by a concomitant increase in non-performance and default rates. This leads us to conclude that the housing market is still healthy as long as the commercial banks keep exercising prudence in their assessment of client creditworthiness.
The second important element relates to the gradual erosion of purchasing power. The deterioration of the house price to income ratio has been further eroded by the current inflation spike emanating from the surge in commodity prices. There is the risk that these two factors could make property increasingly unaffordable for first time and holiday home buyers. This is also compounded by an average increase in effective interest rates up by almost 1 percentage point since 2005. Inflation forecasts indicate that consumer prices are not expected to decelerate below 3 per cent in 2008.
The housing market is thus in an unaccustomed position, certainly as far as prices are concerned. For years, we have had soaring house prices against a backdrop of low general inflation. Real, inflation-adjusted house prices thus rose sharply. Rising inflation, in one respect, makes life more difficult for the housing market. On the other hand, higher inflation makes the house-price adjustment a little easier. Last week’s quarterly review published by the Central Bank of Malta reported an average levelling out in the growth of prices of advertised property. This period of market realignment in property prices is indispensable not only to guarantee the affordability of property but also to enhance Malta’s competitiveness as a property investment location.
This brings me to the third important element: Property as an attractive investment offer. While price, tax and location sensitivities bear heavily on an investment decision, it appears to me that we are not appreciating enough the net economic gains from investing in property in Malta. Over the past four years, net inflows in property purchases by foreigners amounted to an average of €100 Million per year with around 400 being granted an AIP permit on an annual basis. This represents roughly 20 per cent of the total Foreign Direct Investment inflows on a yearly basis. At the same time, real estate in 2007 maintained its share as the second largest contributor to income growth. Maintaining the strength of the property market is therefore an important social consideration in policy formulation.
The last element which I believe requires immediate attention is the one relating to the real estate product itself. Only last year, MEPA approved permits for more than 11,000 dwellings. With an average of 2,400 first time buyers per annum representing an estimated 40 per cent of the total property sales one can guesstimate that the country requires a supply of 6,000 residential dwellings in any one year. The demand-supply mismatch is therefore glaringly obvious and it can only be addressed through a reallocation of resources towards high-demand investments like commercial real estate or a strategic push to tap foreign markets to increase property purchases in Malta by foreigners.
Unless all these elements are considered in the shaping of a future strategy for the real estate sector, there is looming on the horizon significant liabilities for developers and investors, both local and foreign, as their projected returns on investment fizzle out through a tighter controls on credit imposed by the commercial banks due to the incapacity to raise enough capital to finance their investment. This is accentuated by the higher construction and labour costs, squeezing further the percentage return on outlay.
In the light of the above considerations, it becomes pertinent to ask ourselves some soul searching questions: Is our property market an exportable product? ; Are developers and sellers being realistic in their price setting expectations and are we, estate agents giving fair advice on valuations? ; In terms of a holistic investment strategy, are we addressing some critical success factors in the supply chain, namely redressing the soaring demand for commercial office space and residential letting to foreign investors? ; Can we afford a silo mentality in investment promotion and should property investment reside along tourism, enterprise and financial services promotion? ; Is property not an indispensable element in the marketing of product Malta?
Maybe we can react to these questions in the following panel discussion but in the meantime, allow me ladies and gentlemen to outline what I believe might be a three-tier approach towards the unfolding of an national integrated marketing and investment policy.
The first pillar which I consider to be of fundamental importance is what I call: Strategic Choice. This means that we need to think more about less and to focus on specific markets, industries or sectors which render the highest possible value added to our country. This can be done through market research, competitor analysis and international benchmarking exercises. These should lead us to update the current industrial policy, to one which focuses on investment promotion and competitiveness. The key players for the identification of this strategic choice could be Malta Enterprise and Finance Malta together with key stakeholders in government, industry and the social sector.
The second tier follows from the first. Once the strategy is outlined, a policy alignment process would need to kick in to ensure that all the economic and social actors embrace and work towards the same goal. Crucial players in this tier are the all regulatory authorities, local government and civil society organisations. This process will ensure that Product Malta is coherent, well packaged and holistic – an exportable product which can be showcased and promoted as such.
Which leads me to the final tier towards the implementation of an holistic investment policy – namely, integrated marketing and promotion. This is where we cannot afford to keep going amiss. As a small country with limited resources it does not make sense of sizeable budgets to be spent by each stakeholder to market its own little nook to the outside world. Synergies need to be developed for a symbiotic marketing effort which would leave a greater impact especially when competing with competitors rich in resources, opportunities and capacity. While proving for an element of competitive international marketing, I strongly believe that we can do more with the current resources allocated to Malta’s promotion abroad be it from a tourism, investment, property, diplomacy and hospitality perspective. All of these sectors represent stakeholders which can, with goodwill and effort, come together to communicate a stronger message about Malta abroad. In this sense, there should be little distinction between attracting tourists, to attracting property buyers, to attracting business since a tourist is a potential property buyer and a potential entrepreneur; a property buyer is also a potential entrepreneur and surely a repeat tourist; while a new business venture would require property acquisition and will result in more and better holiday makers.
The prevailing economic and global circumstances require a focussed strategy and an integrated effort to enhance our comparative advantage. The real estate market can only maintain its strength if it acquires the capacity to anticipate demand and not fall prey to perceived short term gains. From a macro-economic point of view, we believe that it is in government’s interest to consider property as a high-yield investment proposition and accord it the right policy framework for it to operate in an unfettered environment. Real estate has delivered economic growth and there should be no reason why its delivery is not sustained moreso enhanced should it be integrated within a cogent strategy of investment and tourism marketing. This is where the real brand Malta begins!