Building on solid foundations | Trafford Busuttil

Addressing a recent symposium entitled (if you’ll excuse the loose translation) ‘Quo vadis, Property Industry?’, Trafford Busuttil, of the Malta Business Chamber’s real estate sector, outlined a number of ‘new realities’ facing the market today.

These included an increase of some 21,000 in Malta’s population over the last 10 years; around 11,000 separation cases over the same period; bank deposits exceeding €10 billion in total; a 30% increase in average salaries… and, perhaps more pertinently, that the total number of vacant properties on the island now stands at roughly 53,000… not including an additional 10,000 temporary residences (villegiatura).

I meet Trafford Busuttil in one of Malta’s more impressive properties – the Exchange Buildings, aka the old Borza, on Republic Street, Valletta – and beneath a series of sombre 19th century paintings depicting the Grand Harbour from all possible angles, he elaborates on the implications of the above statistics.

“The Chamber recently commissioned an extended economic study of the market, and it transpires that the total value of Malta’s vacant property stock stands at around €7.6 billion…”

He stresses that this is only a tentative value, but one which is based on realistic appraisals. “That figure was reached on the assumption that the average value of apartments stands at €105,000; maisonettes, €120,000; terraced houses €230,000, and so on. These are conservative estimates, by the way. But we felt we had to give this market a value…”

The same figures however also appear contradictory, viewed in the context of an increase in population (and hence, presumably, demand), as well as affluence (hence purchasing power)… not to mention a steady increase in foreigners temporarily moving to Malta, to be engaged in sectors such as ITC, online gaming, etc.

How does he account for such a glut in vacant, unutilised properties… when such property should theoretically be in high demand? Busuttil admits he has no hard and fast answer… preferring to look at the situation as it is on the ground, and suggesting things that can realistically be done about it.

“Our point, as Chamber, is that this stockpile of unutilised property is just sitting there, not generating any income for government, or making any contribution to the economy. Imagine the total value of that property was invested in the economy instead. €7.6 billion, taxed at 5%, would translate into €350 million in revenue for government. That’s the equivalent of 7% of GDP…”

So why isn’t this happening of its own accord? Leaving aside those properties which are either unusable, or tied up in family disputes, etc – what is keeping owners of ‘viable’ (as it were) properties from putting them on the market to begin with?

“Let’s look at it from a rental perspective,” Busuttil begins. “At the moment there is a downward slump in property sales. There is no point in denying this. But the rental market is a different proposition.”

Even under such apparently favourable conditions, Busuttil reasons that it is still not worth an owner’s while to put second properties up for rent.

“The situation at present is that, if I had a second property to invest in the rental market – for argument’s sake, a two-bedroomed apartment in Sliema, valued at around €191,000 – it would be rented out for between €550 and €600 per month… depending on location, specifications, etc. That makes for a gross return of 4% - which is not very high, especially when compared to other European countries…”

There is also a fee charged by the Malta Tourism Authority, equivalent to one month’s rent, as well as other direct or indirect taxation which – when all other calculations are taken into account – leaves the property owner with a net return of just 3% on his or her investment. As Busuttil said in his presentation last month, “that figure speaks for itself.”

So what is the Chamber proposing instead?

“Our proposal is to offer the property owner an incentive to put his property onto the market, in the same way as it offers incentives to financial services. If anyone invests in a second property, it is reasonable to assume that they will be in the highest tax band: i.e., taxed at 35%. At present, any rental income from second properties will be added to the total income, and taxed at that rate. What we are suggesting is to keep them separate, and charge a final withholding tax of 10% instead.”

Busuttil talks of this as a win-win situation for all concerned. “The owner will be receiving a higher return on his investment, so he’s happy. Government will be taking in more revenue too, as these properties would otherwise not have been generating revenue at all. So government is happy as well. ”

And there is yet more happiness to be spread around, too. The increase in availability of property would also provide a realistic alternative option for Maltese house-hunters who cannot currently afford to buy a property.

“Besides, the country needs a larger supply of rental property to cater for the growing demand among people coming to Malta to be employed in the IT and similar sectors.”

On the subject of this influx of foreigners now looking to buy or rent properties, I turn to the famous (some would say infamous) ‘permanent residence scheme’ that was abruptly scuttled at the beginning of the year – much, it seems, to the property market’s chagrin – only to be replaced with a new scheme aimed at attracting ‘High Net Worth Individuals’.

Among the finer details of the new scheme is that applicants are now required to purchase property of over €400,000, or rent at €20,000 per annum… a substantial increase over the previous thresholds of €69,000 and €4,150 respectively.

More controversial still is the government bond of €500,000… extended by €150,000 per dependant.

It seems, then, that government was not exactly joking about the ‘high worth’ side of things. But how feasible is it to pitch this sort of scheme to such an improbable income bracket?

“Before going into the new scheme, I think it’s only fair to point out that the old one had two very serious weaknesses,” Busuttil acknowledges.

The first of these weaknesses, he explains, exposed the scheme to the possibility of abuse, whereby people avail of services at enormous expense to the Maltese taxpayer. One person alone is understood to have benefited from health treatment running into millions of euros, with the bill footed by the government of Malta. Given such a drawback, Busuttil admits that some form of revision was necessary.

“The second problem was that the law presented itself as a ‘permanent’ resident scheme. But it wasn’t permanent. It was for only five years.”

This, he adds, in turn created legal and bureaucratic issues at European Union level. “If you state that something is ‘permanent’, the EU tends to interpret that literally…”

But while more or less everyone concerned acknoweledges that something had to be done about both situations, Trafford Busuttil remains deeply sceptical about the revision exercise itself.

Echoing other complaints from players in the property sector – among them, veteran estate agent Frank Salt, who lambasted the new scheme in a recent newspaper article – Busuttil talks of the changes as a classic case of throwing the baby out with the bathwater.  

“In our opinion, there was no need to suspend the scheme for nine whole months in order to address these two issues. This was very damaging to the island. Imagine being a client who has applied for the scheme, or who is thinking of applying, and yet not knowing what’s going to happen for nine whole months…”

This sort of uncertainty, he argues, erodes confidence in both the scheme and the country that promotes it. He also argues that the changes themselves went well beyond addressing the original shortcomings, in a sense also reinventing the entire scheme into something new and considerable different.

In his view, it is as though the Maltese property market suddenly awoke one morning to find itself competing in a whole new ballgame.

“In everything in life you have ‘leagues’,” he observes. “In football we talk about the Premier league, the first division, second division, and so on. Even at school, we were always used to playing against players of the same level…”

However, government seems to have lost sight of this basic underlying reality when it came to its reforms.

“With the old scheme, we were competing against countries within the same division, and at that level we were at the top of the table. Today, we are in the highest league there is. We’re now competing against countries like Canada…”

There are, however, a few differences. In Canada the expected investment is of €1 million, paid in two instalments. Surely, this is more than double the equivalent sum in Malta…?

Trafford Busuttil disagrees. “Not when you also factor in the dependants. Consider the example of a married couple with two children, looking to move to Malta under the new scheme. “They would now have to pay a down-payment of €500,000, plus €200,000 per dependent… it already adds up to €1 million, and that’s not including the minimum €400,000 on the property itself.””

However, Busuttil argues that the real difference concerns what the client gets in return: “In Canada, you get a passport.”

Coming back to Malta’s previous competitors in the old league: one such country was Cyprus, which offers much the same product – residency – for an investment of only €300,000, as well as proof of a €25,000 per month income for a family of three.

I refer Busuttil to the Finance Minister’s objection that Cyprus was not a fair comparison, as it outside the Schengen zone.

“Actually Cyrpus is signatory to Schengen, but it hasn’t yet adopted the regulations,” Busuttil returns. “But let’s accept the minister’s point that the comparison doesn’t hold. A good example of a Schengen country we used to compete with is Latvia. If a third country national invests €142,500 in property in Latvia, and provides proof of a monthly income of €850, as well as €200 per dependent, he will be eligible for the same benefits that in Malta would cost so much more…”

Nonetheless, Busuttil acknowledges that not all the charges associated with the new scheme are inflated.

“There is no bone of contention regarding the minimum price of property, €400,000. That is entirely reasonable, considering the type of person the scheme is aimed at, and the reality of the market itself. But in our opinion the half-million deposit, as well as an additional €150,000 per dependent, is excessive.”

Busuttil also doubts the terminology used to justify this expense. “Government calls it a ‘bond’. But it’s actually a one-off payment…”

Yet another of these doubts concerns ‘hidden’ costs over and above the down-payment and property investment. “There is an application payment of €6,000, which we think is onerous. Part of the justification for this sum is to pay for a due diligence process all applicants have to go through: a sort of test to determine whether they are ‘fit and proper’ for residency under the scheme…”

And who gets to conduct that test?

“I don’t know,” Busuttil promptly replies. “It’s a private overseas company, but I don’t have any details.”

He also raises another grey area, this time concerning eligibility. “We have a number of people who applied prior to 2010. Which rules are applicable to them?”

Clearly, not the original rules, as the scheme for which they applied no longer even exists. “I would find it unfair, if people who applied under previous regulations, are suddenly told they have to buy a property worth at least €400,000, on top of all the other charges.”

This category of applicant – caught as it were in No Man’s Land – may also include a few who originally rented property under the old scheme. “What if they change their mind and choose to buy instead? What rules apply to them now?

Busuttil himself is an estate agent, and as such deals with such clients individually – while also representing his peers on the Chamber. What was the general reaction among clients – actual as well as prospective - to the new scheme?

He shrugs. “Reactions were mixed. But on the whole clients were not very receptive.”

Naturally government begs to differ, and recently Tonio Fenech defended the new rules on entirely different grounds. Without saying it in so many words, the finance minister seemed to be suggesting that the scheme itself had not been drawn up specifically to help real estate agents sell more properties.

Taking this line of defence one step further, would it be fair to say that the property market is looking at things only from its own perspective, and therefore losing sight of the the bigger picture?

Busuttil shrugs. “Possibly, yes. But government also wants to attract the higher income earner, and the property market is itself part of that bigger picture…”

Inevitably, he falls back on his earlier point about client response/

“The question we ask is: will the market be receptive? If so, then the scheme is good for everybody: it’s good for the property business, for the government, for the foreign residents, everybody. But in life you have to question these things. As for the Chamber, we have our doubts.”