Malta’s property glut is now in trouble

Concerns about Malta’s weakening construction and real estate sector were given a worrying picture by the Central Bank’s financial stability report last week.

The report has warned banks to remain vigilant on their exposure to high credit risk and the effects a decrease in property value could have on their collateral.

Michael Falzon, a former minister and now president of the Malta Developers Association, confirms the decline and the correspondingly “exaggerated” trend of property disposal by barter.

“You get a plasterer to gypsum up a new block of apartments, and he doesn’t get paid in cash. You give him one of your unsold apartments. But eventually, this stock must get sold some time or other,” Falzon said.

Falzon says the excess stock eventually pushes real estate prices downwards, and warned of the danger this could have on the value of hypothecs.

And true to his observations, the Central Bank says that sectors like the construction business are experiencing a disparity between the supply and demand for property.

Adding more concern for some construction mega-projects was the Bank’s warning that global uncertainty on property prices abroad was dampening interest from foreign buyers – something that would affect the feasibility of construction projects in Malta targeting the high-end property segment. Many examples abound, such as the Fort Cambridge, Tigné Point, Mistra Heights and A3 Towers, of high-end luxury development in its embryonic or completed stages.

“There are cases in which property agents are simply cutting their losses and selling off property at no profit at all. But when government architects come round to do the valuation of the sold property, they are not accepting the line at all that such property is being sold at cost value. And this means paying higher taxes on zero profits,” Falzon said.

High credit risk in 2011

Critics know that Malta has a glut of empty property and in the last decade the trend for high-end 400-unit tower blocks, hoping to lap up foreign cash, became the battleground for environmentalists and developers. There is no doubt that the over-supply is biting back.

Credit risk – and how a decrease in property prices would affect banking collateral – loomed large in the Central Bank’s financial stability report. Specifically, it said that in 2011 some economic sectors will maintain a strong momentum; but others with large credit from the banks – like construction – were likely to lag behind.

Economic growth in Malta was driven largely by the financial and business services sector and the electronics industry, which do not generally resort to domestic bank credit. The largest borrowers are the construction and real estate sector and the wholesale and retail trade sector.

Several companies in these sectors faced some difficulties dur­ing the year, the Central Bank said. Non-performing loans increased by over a third during 2010 to €643 million and are equiva­lent to 50% of the banks’ total own funds (14 percentage points higher than a year ago). That means the ratio of non-performing loans has risen for the second consecutive year to 7.3% in 2010 from 5.6% in 2009.

“The continuous upward trend in property prices for more than a decade has resulted in ‘disaster myopia’ – an illusion that property prices never fall – with banks using a conservative valuation of collateral as a prime mitigating factor,” the Central Bank said.

And it also warned that the effects from a weakening in global economic conditions could affect the construction and real estate sector, and even “propagate to other economic sectors”. In fact it made special mention of the heightened credit risk from banks’ large exposures to the real estate sector as one of Malta’s main economic vulnerabilities.

How bad is it?

The Central Bank says non-performing loans in Malta’s corporate sector rose in 2010 by almost 40% to €527 million. These developments were largely driven by the default on bank loans of a number of companies in the construction industry – of note was the €40 million call-in by Bawag Bank of a loan by the JPM Brothers firm on the construction of the Mistra Heights mega-complex.

So for the construction sector alone, in 2010 non-performing loans were 23.6% of total corporate loans.

But the Central Bank also says banks have tightened credit standards and are more cautious in extending their exposure in order to mitigate industry risks and specific company credit risks.

There was also a marked increase in rescheduled facilities, which rose by 14.5%. The largest segment of rescheduled facilities was in the construction sector which accounted for nearly half of the revised arrange­ments. “This confirms the subdued state of the property market which has negative repercussions for the construction industry. Gross problematic assets increased to 9.3% as a percentage of total loans.”

Decline in ink

Indeed, the Central Bank’s latest quarterly review confirms a 2% drop in advertised (newspaper ads) prices on property, year-on-year, during the end of 2010. The decrease actually fol­lowed nine months of persis­tent growth.

And the most significant drop in prices during the last quarter of 2010 is in fact for apartments and to a lesser extent terraced houses. The Central Bank says prices of apartments, which make up almost three-fifths of advertised properties, experienced a decline of 0.8%. Over the year as a whole, apartment prices had been 2.6% higher than in 2009.

Even advertised properties declined by 5.9% in 2010. Moreover, the number of building permits issued by the Malta Environment and Planning Author­ity (MEPA) decreased by 22.4% year-on-year in the December quarter, following an increase of 4.3% in the previous quarter. This was mostly due to a lower number of permits issued for apart­ments (80% of the total issued) and maisonettes. In 2010, the number of issued permits was 16.1% smaller than in 2009.