Developers bemoan tighter bank credit, but minister says industry must change

The ailing construction industry will have to change if it has to survive in tighter banking credit conditions, Finance Minister Tonio Fenech has warned.

Under the ominous clouds of bank loan call-ins, Malta's developers are finding it hard to expand their concrete footprint as banks heed the call from the Central Bank to limit their exposure to the construction industry. And Fenech largely shares the CBM's advice for prudence.

In its regular reviews and 2011 annual report, the CBM warns Malta's major lenders to heed the woeful lessons from Spain and Ireland's housing markets. And the banks have responded, with the share of lending to construction slightly easing to around 10.5% of total assets in 2011. To this day, the CBM keeps encouraging banks to reduce their risk to the construction industry.

It's not just the middling developers who feel the pressure to sell off quick. Even with apartment sales of €32 million in 2011, Tigné Point's developers MIDI say tighter credit this year could mean changes in the use of their asset base. Good thing MIDI's shareholders include Bank of Valletta.

But what do developers say? Michael Falzon, the president of the Malta Developers Association, insists that the 12% final withholding tax they pay on sale values is stopping developers from lowering selling prices to remove their stocks fast.

"Even in the face of pressures from the banks, they can end up in the position of paying more in tax than the capital gain that is purportedly being taxed," Falzon said.

Tonio Fenech is conscious that banks are being extra careful over loaning cash to new property projects. "They're careful to not replicate the threat of a property bubble that we have seen in other EU countries. Banks are fearing write-downs on property values, so it is understandable that Maltese banks, which have a strong tradition of prudence, are careful about loaning out this cash."

But Fenech also says property developers must change.

"We introduced new incentives for residential restoration opportunities in the last Budget, and there are certainly many capital projects around that involve the construction industry, such as the Life Sciences Park, the industrial estates, roads, and the new oncology centre.

"But they cannot thrive just by building apartment complexes for newlyweds. The need for quality office space for industries like gaming and back-office operations is growing. The industry needs to study better these new opportunities."

Falzon also believes that developers should seek new pastures rather than stick to the trodden path. "We did make suggestions on how to encourage developers to invest in the rehabilitation of existing buildings in urban conservation areas. But the incentives introduced by government apply to owners of housing units, and not to investors who carry out this rehabilitation work to supply the market with rehabilitated houses in these areas."

Falzon says the MDA is wary of the Spanish bubble being replicated here. "But we insist on policies that can manage the deflation of the property sector, especially considering the reliance of our banking system on assets that are in real estate."

The concerns of the weakening construction industry were illustrated by the Central Bank's financial stability report, which found non-performing loans in Malta's corporate sector rose in 2010 by almost 40% to €527 million.

For the construction sector alone, in 2010 non-performing loans were 23.6% of total corporate loans. Exceptional cases of call-ins include the much-vaunted Mistra Heights by the Montebello-Massaleh consortium (Gemxija Crown), which saw Bawag Bank call in the €42 million loan.

Equally unhelpful was the long suspension in 2011 of the property residence scheme, which bound tax exiles to high-value property purchases.

On their part, the banks confirm their wariness over-lending to the property industry. A spokesperson for Bank of Valletta says its prudence has served it well through the economic crisis. "We have monitored this very important segment of the economy, and we're aware of the risks posed by the rapid increase in development over the past decade, and the impact oversupply can have on developers' leverage."

BOV insists it has continued to make credit available, even during the difficult times. But what do they say of Falzon's claims that banks are putting renewed pressure on developers to pay outstanding loans in a bid to reduce their exposure to the industry?

"A repayment schedule must be honoured... of course, the bank is aware that both internal and external circumstances may affect a developer's financial situation, but it is not in anyone's interest to ignore warning signs as such problems tend to escalate if ignored," the BOV spokesperson said.

HSBC Malta offer a prediction that the months ahead "are likely to be difficult" and that major property players have had to adopt a more cautious stance.

"Property has seen a decline and a price correction from the 2007 peak, though there are significant variances linked to location and property type.

"HSBC is exposed both directly and indirectly to the property sector. We'll remain prudent when considering additional exposure in the construction sector, but we continue to support existing customers on a case by case basis."

Construction is no longer king in Malta: economic growth is being driven by the financial and business services, and electronics industries, which unlike construction need less bank credit.

But the unstoppable rise in prices for more than a decade has led to what the Central Bank calls 'disaster myopia' - an illusion that property prices never fall.

Weaning this industry off the fast money made on easy planning permits and price speculation, will be the hardest pill to swallow.