[ANALYSIS] Citizenship for a house?

Veteran economist Lino Briguglio has warned of a possible increase in property prices after government tied the acquisition of citizenship to buying or renting property in Malta.

But these fears are being downplayed by Malta Developers Association president Michael Falzon, who points out that there is already an over-supply of mid-range properties.

Under the new Individual Investor Programme rules, acquiring Maltese citizenship now requires, apart from paying a €650,000 donation, €100,000 in government stocks and the purchase of a property valued at least €350,000 or rent a property for €16,000 a year.

In both cases, applicants will be contractually bound to keep the property for at least five years.

With the scheme capped at a maximum 1,800 applicants and their dependents which may include children, spouses, spouse parents and grandparents, the scheme is expected to generate a greater demand for property. "If it succeeds, the scheme will have an impact on the property market in that it will step up demand for property... even if the scheme seems to be mainly aimed to increase revenue into government coffers," economist Lino Briguglio told MaltaToday.

According to the veteran economist, increased demand for property will, in turn, have both advantages and disadvantages.

"The pluses include increased income for estate agents and increased income for contractors and employees most of whom will be immigrants," Briguglio says.

Income can also be generated as a result of expenditure by buyers of properties, if they visit Malta, and more so if they invest in Malta.

But he also warns that the negatives include more environmental damage and more disturbance of neighbourhoods as a result of the "cowboy attitudes of developers". Moreover, there could also be inflationary pressures on the property market, "to the detriment, mostly, of young couples who are first-time buyers".

One of the risks pointed out by a real estate agent who spoke to this newspaper, is that in the absence of any obligation to actually reside in Malta, prospective citizens with lots of money to spend but little interest in living in Malta may be willing to pay higher prices than Maltese buyers who presently afford to buy mid-range priced property.

"Surely the scheme is a godsend for the property market but there is a risk that some of these clients will be willing to pay more than the Maltese simply because their main interest is that of purchasing citizenship not property... For them buying property will be a means to an end rather than an end in itself," the real estate agent told MaltaToday.

Malta Developers Association president Michael Falzon however thinks that any inflationary effect would be restricted to the medium-priced properties.

This is because the indicated minimum value (€350,000 in case of a sale an annual rent of €16,000) is well beyond the lower end of the property market and the average value of property bought by first-time buyers.

"If there is an inflationary effect as a result of the IIP, this would be restricted to the medium-priced properties. However, since there seems to be more supply than demand in this range, the inflationary effect will probably be slight."

But IIP citizens may be more than tempted to sell their properties immediately after the expiry of the five-year period during which they are forbidden from doing so.

Falzon downplays the risks that after the expiry of the five-year period, many would sell their properties again, contributing to a bust in prices due to an oversupply of properties in the market. "It is ludicrous to assume that a large number of properties will all be bought on day one and the same properties will then all be sold on day one after the expiry of five years. Properties are being sold and bought all the time and the net impact of the IIP should be an increase in the volume of sales."

On his part, economist Gordon Cordina lamented the lack of studies on the potential impacts of the increased demand of property on property prices.

"Credible estimates to form opinions to answer your questions require detailed study. However, your questions do point to the need for such studies, and perhaps even more importantly, for additional policies and  measures to support the Programme to ensure that potential benefits are maximised while avoiding pitfalls."

By the time of going to print, questions sent to government on whether any studies have been conducted to assess the impact of the scheme on the property remained unanswered.

The IIP was devised following consultation with the Federation of Estate Agents and the Chamber of Commerce, representatives of which were present when the scheme was launched.

Falzon also admits that it is very difficult to assess the impact on the property market as a result of IIP being made conditional to the purchase or renting of property, "mostly because one cannot predict how successful the IIP will be as there is no model on which to base expectations".