Updated | Corinthia land values given 57% discount

International Hotel Investments has been given a hefty 57% cut on the total land value of the St George’s Bay peninsula, for having acquired the neighbouring Radisson hotel after their acquisition of the Island Hotels Group.

IHI plc – Malta’s foremost international hotel chain – was given a €33 million ‘discount’ from the €121 million valuation of peninsula development, as a “credit” on the Radisson hotel when they acquired the Island Hotels Group in 2015.

IHI plc is planning a €600 million redevelopment to replace its two hotels and the Radisson with a six-star and five-star hotel, as well as residential and office development, and possibly a land reclamation project.

But the hotel giant will require approval from Malta’s parliament so that the lease it was given in 1992 for strictly touristic development only, be amended to allow the mixed-use development.

In their valuation for the land in question, auditors Deloitte adopted land values it used for the site at the former ITS college where the DB group will develop its own high-rise hotel, but then factored in a series of credits to the total €121.7 million valuation of the land.

The total value was calculated at €1,250 per net internal square metre for all residential and office areas – roughly the price for parliament’s waiver on the development restrictions and for a 99-year concession on the land.

Of that total valuation, Deloitte deducted €16.1 million for the infrastructure costs that IHI will fork out for the public areas around the project. But it also got a further €9 million as compensation for the existing Marina Hotel which will be demolished, as well as €33.4 million for the Radisson, and another €12.9 million for “additional tourist-related development” that takes place on the site.

That brought down the total valuation of the area to €50.3 million, slightly revised upwards to €51.4 million. DB Group, granted a neighbouring site for a 38-storey high tower, was slated to pay €60 million.

On its part, IHI plc made it a point to state that it already enjoys long-term exclusive rights to the land.

IHI chairman Alfred Pisani – who was present at the parliamentary committee hearing on the proposed project – backed up justifications by tourism minister Konrad Mizzi that such a six-star development was conditional on “compensation” for forgone hotel assets that will be demolished in the process. “This investment comes with some considerable sacrifice… the revenue that will come in for the country will be three times what it is today. One has to respect the risk, and vision for the country… to introduce to this country a standard it has never seen before.”

In comments to MaltaToday, Konrad Mizzi said IHI had to buy the Radisson to deliver a “holistic project [entailing] the upgrading of the entire peninsula into a six-star destination”.

“Given that a significant portion of the proposed development will be undertaken on the land occupied by the Radisson, it is only logical that one deducts the cost of acquisition in order to determine the difference in value between current and proposed use, once the restrictive use clauses are lifted,” Mizzi said, adding that the €33.4m value is an estimate for what IHI paid for the Radisson.

When government sells public land to be used for residential purposes at below current market prices, it distorts the property market and abandons the concept of a level playing field for all the players in this market MDA

Apart from that, IHI’s credit for additional tourism development of €12.9 million was explained as the forgone value from the additional tourism development IHI could have reaped on its three hotels had it carried on business as usual – at the rate of €50 per sq.m.

Observers will note that while IHI was expected to pay a high price for the political green light to redevelop the peninsula, the government is also generous in applying a 57% discount in the form of ‘credits’ to the total price. Even the Malta Developers Association said it disagreed with Deloitte’s estimate of the land prices, saying it was “far below market prices”, and that since the ITS valuation, prices had risen.

“When government sells public land to be used for residential purposes at below current market prices, it distorts the property market and abandons the concept of a level playing field for all the players in this market,” the MDA said.

Mizzi defended the valuation, saying that upon becoming tourism minister in 2017, fresh negotiations were held with IHI to improve upon the 2015 memorandum of understanding to raise the original €38.7 million payment for the waiver of restrictions, to €51.4 million.

That included limiting residential and commercial development to 100,000 sq.m, increasing the premium paid up front to the government from €12 million to €17 million, and also increasing the rates of converting the emphyteusis to a perpetual title.

“The project will bring about significant direct and indirect income to the government [and] multiple tangible benefits to Malta as a direct result of this development that will yield far-reaching positive benefits to the island in general,” Mizzi said.

But there is still a big question as to why such arbitrary credits were needed to bring the higher valuation of the land, down from €121 million to €51 million.

When in 2015 IHI plc acquired Island Hotels – ostensibly the only deal it could do if it was to acquire the Radisson for its St George’s project – its new assets comprised the ownership of the two Radisson hotels in St Julian’s and Golden Sands, Island Caterers, the former Hal Ferh complex, and the operation of Costa Coffee in Malta and in parts of Spain.

That added a total of €91 million to the value of IHI’s principal properties, of which the Radisson St Julian’s was valued at €37.7 million in 2015. Since then, the hotel’s performance has also improved, with gross operating profit jumping by 73% from €2.6 million in 2015 to €4.5 million in 2016.

Island Caterers too benefited from the EU presidency in 2017, to see revenue grow by €500,000 to €6.5 million in 2017, while the Costa chain across 11 outlets saw sales increase 14% by €900,000 to €8 million in 2017.

IHI statement—we already hold title to land 

IHI released a press statement in response to media stories on the land value. They said that they already hold the title to the land in question.

"On our side, our position on valuation is one grounded in a starting point where the company already enjoys long-term exclusive rights to the land, and any further payments to be made should be relative solely to the removal of restrictive conditions that currently force the use of the land for tourism-related developments," Alfred Pisani, IHI Chairman, said. 

IHI Chairman, Alfred Pisani

They insist that Corinthia's agreement to guarantee payments to the government of around €53 million would be equitable and a fair balance in relation to potential returns from the development of a maximum of 100,000 square meters of real estate. 

IHI have claimed that this is a risk on their part, and a plan to attract higher-spending visitors. The overriding plan is to deliver a luxury holistic, six-star environment for a new Corinthia hotel that would match their brand's standards worldwide. 

The highest proposed number of floors is currently 15, they said in the statement. "Subject to parliamentary approval and signature of our revised title deeds, and subject to planning approvals, we will proceed to our first phase of the project, which envisages the redevelopment of the luxury Corinthia hotel."