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Maltese real estate offers 7-10% Returns

November 9, 2019

Dubai

International investors and property buyers could benefit from a relatively high return of 7-10 percent on investment in to Maltese real estate assets, officials told a group of media from the GCC. This is one of the highest rental returns from real estate in the world.

According to global real estate market advisory Knight Frank, Maltese property market grew a whopping 17 per cent last year – one of the highest in the world.

House prices in Malta are still rising, with a sharp increase of 10.83 percent (9.51% inflation-adjusted) during the year to the first quarter of 2019, according to the Central Bank of Malta (CBM). Property prices rose by 4.72 percent (6.56% inflation-adjusted) during the latest quarter.

Prices were also boosted by government measures including the exemption of first-time property buyers from a 3.5 percent stamp duty on the first €150,000 of a new property´s value.

In 2018, another scheme was introduced, making second-time buyers eligible for a stamp duty refund of up to €3,000 if they plan to replace their current residential homes. Second-time buyers are not eligible if they own any other property, or are upgrading to a luxury villa. Homeowners with disabilities can avail a higher stamp duty refund of up to €5,000.

“Real estate sector contributes about 12 percent of the Maltese gross domestic product (GDP), Chris Agius, Parliamentary Secretary of Malta, told Gulf Property during a recent interview in Valletta, Malta.

“Foreign investors are now exempted from 3.5 to 5 percent property tax. Around 350 developers are active and control the real estate market in Malta. Investment in real estate has exceeded €26 billion in recent years.

“The government means business and it is encouraging foreign developers to build assets – homes, shopping malls and commercial properties. We do encourage investment from the GCC countries.”

Malta received US$4 foreign direct investment (FDI) in 2018 while the country’s FDI stock has reached US$206 billion last year, according to the World Investment Report published by United Nations Conference on Trade and Investment (UNCTAD).

The Maltese economy has continued its robust growth throughout 2018 and is still one of the fastest growing economies in the EU, with GDP expanding 6.6 percent in 2018, following the previous year´s 6.7 percent y-o-y growth, according to Malta´s National Statistics Office (NSO). The better than expected economic performance of Malta, according to the European Commission’s Spring 2019 Economic Forecast, was attributed to the high private consumption growth that occurred in the second half of the year.

“Malta’s economic growth for 2018 exceeded expectations… GDP growth was higher than projected by the Ministry for Finance, the European Commission, the International Monetary Fund and various Credit Rating Agencies,” said Finance Minister Edward Scicluna.  

In 2018, Malta had the second highest budget surplus in EU at around 2 percent of GDP, only next to Luxembourg, marking Malta´s third year of reported budget surplus, after 3.4 percent of GDP in 2017 and 0.9 percent of GDP in 2016. The government is aiming for a fiscal surplus of 1.3 percent of GDP in 2019.

In the last quarter of 2018, Malta´s employment rate expanded to 72.3 percent from 70.5 percent in the fourth quarter of 2017. Malta has one of the lowest unemployment rates in Europe, at less than half of the Euro Area´s average unemployment rate of 7.7 percent.

In Malta, around 80 percent of the population owns homes. However, the economy of this English speaking island in the Mediterranean Sea is growing faster than its regional peers.

Malta´s buoyant house price rises over the last five years have been supported by a number of factors, according to the CBM’s 2018 annual report – Malta’s fast growing economy, which enjoyed an average growth of 9.6 percent in 2014 and 2015, followed by 6.3 percent from 2016 to 2018.

The upswing of house prices in recent years is also due to the Individual Investor Programme (IIP) targeting high net worth individuals, introduced in November 2013.

“Strong demand for housing has continued to push up property prices,” according to a report by the International Monetary Fund (IMF). “While some signs of overvaluation have started to emerge, recent house price trends can largely be explained by fundamentals such as e.g., strong immigration flows, rising disposable income, portfolio rebalancing towards property investment and a delayed supply response.

“Other factors such as the extension of the first-time home-buyer stamp duty relief, the reduced tax rate on rental income, surging demand for tourist accommodation and, for the high-end segment, the IIP may also have played a role.”

Rapidly rising property prices are viewed by the authorities as mainly reflecting economic fundamentals. Inflows of foreign labour and higher income in general are fueling housing demand. The authorities also see the impact of tax benefits for first and second-time home buyers, the reduced tax rate on rental income and the IIP as marginal. 

Low mortgage rates in Malta boost housing loans

Mortgage loan rates have hovered near 3 percent since December 2008. In March 2019, the average lending rate on new mortgages was 2.55 percent, a slight decline from 2.76 percent in the same period last year. In February 2019, Malta´s outstanding loans for house purchases increased by 9.49 percent year-on-year to €5.03 billion (US$5.66 billion).

Moderate rental yields

Rental yields in Malta are moderate, at around 4.4 percent for apartments in favourite expatriate areas such as Sliema, St. Julian’s, and Swieqi, based on Global Property Guide research of April 2018.

Apartment prices in these popular expat spots average from around €3,200 to €3,500 per square metres.

Most Maltese opt to own property rather than rent, with owner-occupancy rates of 81.4 percent in 2016, up from 68 percent in 1995, according to the EMF. Around 71.18 percent of the total rental housing stock is private sector, 26.24 percent government-owned or council housing, and 2.58 percent belongs to the Maltese church.

Rents rose sharply from 2012 to 2015, according to Malta´s National Statistics Office (NSO). The average rent for a single-bedroom apartment shot up by 38 percent from €437 (US$467.20) in 2012, to €605 (US$646.81) in 2015. Rents for two bedroom flats rose by 29 percent to €796 (US$851) during this period, and for three-bedroom flats by 23 percent to €1,023 (US$1,093.69).

These rent hikes are attributed to the increasing number of foreign workers, who mostly live in rented accommodation. The increase is due to rising tourism, more expat workers, and the introduction of the Individual Investor Programme (IIP) in 2017.

New dwelling permits reached a record high in 2018

In 2018, the number of approved development permits for new dwelling units surged by 31.2 percent year-on-year to 12,885 units, beating the previous record of 11,343 units in 2011. Terraced houses had the highest permit increase in 2018, with permissions rising by 43 percent to 396 units.

Apartment permits, which account for more than 80 percent of the total permits issued, rose by 31.7 percent to 11,211 units. Maisonettes also increased by 26.9 percent to 1,166 units, however, ´other property types fell by 0.9 percent to 112 units, according to the Malta Environment and Planning Authority (MEPA).

As of 2013, the residential vacancy rate was 18.4 percent of the total dwelling stock (41,282 units), with 13.3 percent of all dwellings second homes, according to the European Mortgage Federation´s (EMF) Hypostat 2014 report – much lower than the alarming peak in 2005, when 27.6 percent of all dwellings were vacant (53,136 units).

The significant number of vacant properties is partly due to litigation between heirs. In an attempt to address this issue, the government´s 2016 budget reduced from 10 years to 3 years the period after which an inherited property in dispute can be sold, provided that most (but not all) heirs agree on its selling price.

To further encourage the use of vacant properties, the government reduced the stamp duty on transfers of properties within an urban conservation area from 5 percent to 2.5 percent in 2016. Also, transfers of restored properties within an urban conservation area will now have a lower final withholding tax, reduced from 8 percent to 5 percent. In 2017, the government also lowered the stamp duty on properties acquired in Gozo from 5 percent to 2 percent.

Vacant properties don’t pose a serious problem, says Malta Developers’ Association president Sandro Chetcuti. “Just drop this about vacant properties”, said Chetcuti. “There is no problem with this. There are around 55,000 properties and more than half of these are second homes or summer residences while half of the remainder are either dilapidated or being fought over by heirs. The rest are on the market but they are simply overpriced and cannot sell.”

In 2018, the Skema Nikru Biex Nassistu program was introduced, encouraging private owners of one, two, or three bedroomed properties at least 30 years old which have been vacant for a year or more to enter into a lease agreement with the Housing Authority for ten years.

The vacant property owner will receive a maximum grant of €25,000 to refurbish the property. The Housing Authority will then rent the property from the owner in a fully finished state, with the rental based on a set of criteria. During the 10 year period, the owner will receive constant rental payment, with a 2 percent increase annually.

“However, we are working closely with the government in order to develop these mechanisms. It’s a matter of time. The government is serious to bring qualitative changes to the real estate sector.”

More than 30,000 foreigners call Malta their home. There is no property tax, wealth tax or inheritance taxes to be paid in Malta. However, it could attract more, if regulations are tightened.