COVID-19 AND ITS BEARING ON THE REAL ESTATE MARKET

Let’s be frank—the unprecedented situation brought about by COVID-19 put the entire globe to its knees. Its anonymous emergence surprised many to how one should approach such uncertainty, both from a health and economic perspective. Jordan Portelli explains.

Personally, this new phenomenon conditioned the way we socialise, the way we work, the way we consume, and possibly many other habits to which we had to adapt accordingly. Inevitably, these changes in habits have negatively impacted the economy globally, with selective sectors being hit more than others. Domestically, tourism was the harshest hit, however other sectors, such as real-estate, are feeling the pinch too, given that signs of cracks were already showing prior COVID-19.

Over the past years, Malta registered above-average growth, primarily due to significant foreign direct investment the country managed to attract. This inbound in investment had a positive impact on a diversity of sectors, amongst which was the real estate market, with the letting market being at the forefront in registering exponential growth. Indeed, many investors reaped the benefits of this growth, as returns were more benevolent than those being offered by financial markets, given the current low yielding environment. The latter proved to be a source of support for many to leverage themselves and invest in the property market, which continued to uptick prices.

Before COVID-19, the property market was possibly showing signs of a peak, following a record year of 12,885 approved application in 2018. Despite in 2019, the number was on the high side (12,484), a decrease of 3.1% was registered. In all fairness, the exponential trend of approved dwellings over the past years was a clear sign that eventually supply will overtake demand. Thus, the relatively stabilisation or softness in prices comes to no surprise. Moreover, overpriced properties have experienced a price adjustment.

COVID-19 inevitably piled more pressure on the property market, predominately on the letting segment. As previously mentioned, the uptick in pricing was brought about by the remarkable influx of foreigners working locally, which effected the long-let segment positively. Also, the high demand of the short let business, to which many locals found to be another attractive source of investment, is feeling the pinch. COVID-19 has impacted the former given the uptick in unemployment, mainly in the tourism industry with many foreigners previously employed within the sector re-immigrated. The latter was harshly conditioned by travel restrictions, as inbound tourism hit its record lows in history.

DESPITE SHORT-TERM FIXES, SUCH AS THE RECENTLY ANNOUNCED REDUCTION IN STAMP DUTY, WHICH WERE IMPORTANT FIRST-STEPS, MORE STRATEGIC IDEOLOGIES WHICH WILL INDIRECTLY IMPACT THE PROPERTY MARKET SHOULD COMMAND THE GOVERNMENT’S AGENDA

A pinch is also being felt in the office space letting segment. As said, COVID-19 has changed the way companies view the remote working proposition. Over the years, such ideology was a taboo, predominately by local companies. However, as COVID-19 emerged, remote working was not an option but a necessity. Despite many might be still sceptical, others have seen an opportunity to induce the idea in the form of a fringe benefit, but ultimately also reducing their operational cost remarkably.

An efficient example is materialising within the gaming sector. Several gaming companies are transposing the idea into practice. Many have already downsized their office space remarkably and are offering their employees to work three days remotely, and two from the office. This will reduce drastically office rent, given the smaller office space, in addition to the running costs of the office which usually are relatively high. Undoubtedly, these strategic decisions are and will continue to pressure office rent to the downside. Over the years many investors considered office rent as a long-term investment, with notable investments made in strategic locations. This has possibly increased supply remarkably, and now the risk is not solely the possibility of losing existing foreign direct investments, due to possibly our jurisdiction’s reputational risk and other factors, but due to a change in a core habitual.

In June, as part of its post-COVID-19 recovery plan, the government has announced a stimulus package purposely targeting the property market directly. In summary, the stimulus package is through a reduction in stamp duty, and it benefits both the buyer and the seller. The original five per cent duty for buyers has been reduced to 1.5 per cent, while the withholding tax for the seller has been reduced from eight per cent to five per cent. The scheme is applicable for contracts to be finalised from June 2020 until 30th April 2021. Indubitably, such move is benevolent and will give some pace to the industry in the short-term. That said, to sustain the property market, other measures are imperative over the longer term. Structural issues were hazardously in place before COVID-19. The viral infection has amplified and shortened the period of the said structural issues, predominately the supply aspect.

Moving forward, one should be conscious that a sustained slow down within the property sector, predominately within the rental market, can have severe implications towards the broader domestic economic spectrum. It’s no secret, investors who leveraged themselves and have serviced their ‘buy to let’ loans through a certain level of rental income, might be in a tight situation if they fail to retain previous rental income levels. In turn, this will possibly have severe implications for the banking system through an increase in non-performing loans.

Thus, given its notable contribution towards domestic economic growth, in addition to the threat of hindering the economy in the future, other mechanisms for long term sustainability are imperative. Despite short-term fixes, such as the reduction in stamp duty (the reduction scheme of which is set to end in April 2021) were important first-steps, more strategic ideologies which will indirectly impact the property market should command the government’s agenda. The first-mover advantage of law enactment within the gaming industry way back in 2004 and the more attractive tax regime, are clear past strategic examples which contributed immensely to the property’s market growth. Now more than ever, more strategic thinking is crucial towards the sustainability not solely of the property market, but the entire domestic economy per se.

Jordan is an economist and a portfolio manager for a local asset management company.