Brexit and the Dubai-ification of Malta

Paul Johnson, director of the Institute for Fiscal Studies, said that having voted for Brexit, the British economy is clearly going to go into a down swing that might be a fullblown recession, or at best just very, very, low growth.

But putting aside the negative effect of Brexit and increased terrorist attacks in central Europe, it is not all doom and gloom since the Med is again enjoying a boom in tourist arrivals both by traditional routes and on board cruise liners. Minister for Tourism Chris Cardona appeared buoyant exclaiming that the upward trend is continuing and in his words nearly 40,000 cruise liner passengers arrived in Malta in the first quarter of this year, an increase of 90 per cent over the same period of 2015.

The next trophy goes to Malta International Airport (MIA) which recently announced that net profit for the year increased from €16.8 million to €19.3 million. Such commendable results are largely attributable to the record number of guests travelling through the airport last year. MIA‘s smart diversification plan amounting to €78 million included the building and rental of SkyParks Business Centre at the airport, which was a key driver for non-aviation results, most notably since it has now reached its full retail and office potential. Contributions from the airport’s retail outlets, car park, and VIP product also led to growth in non-aviation revenues.

This all looks hunky dory and hotel owners are busy submitting development plans to Mepa to expand and build more rooms while older ones are being pulled down. As travellers shy away from visiting Turkey, Tunisia, Egypt, and other destinations tinged with the threat of terrorism, four countries such as Spain, Portugal, Malta and Italy are expecting a bonanza. This results in record numbers of cruise ships while airport capacity is pushed to the limit and roads are busy in summer. The summer season is in full swing and it is no surprise that bars, restaurants and roads in Spain, particularly Mallorca are thronged with people while the famous dance clubs of Ibiza are busy with parties even earlier than last year.

As can be expected, the cruise ships which look like giant floating watering holes are already looming large in the Mediterranean. One can never overstate the popularity of the Balearics, which have just three times our population yet hosted almost 13 million visitors last year. Palma is already pushing its airport capacity of 66 flights a day to 100 this season.

The fly in the ointment is what happens if Brexit ruins the party and arrivals from UK start to drop? It is a dichotomy that the local tourism industry is feeling smug, claiming that contracts for this season at fixed euro/sterling prices were signed last year, but what will be the situation next year as sterling devaluates? In Britain, politicians from opposition parties such as Labour and Scottish Nationals are saying inflation will explode and this can make life miserable. Sadly, due to Brexit, the pound has fallen to a 31-year low trading at about $1.345, a fall of 1.7 per cent although it has partly recovered since then. Not so cool was the reaction from across the channel as European diplomats have dismissed claims by Boris Johnson, the foreign secretary, that the UK could negotiate access to the EU single market without obeying any of the rules.

The Guardian reported an EU diplomat as saying, “You cannot have your cake and eat it,” as the Treasury’s forecasts for postBrexit Britain included predictions that the economy could slip into recession. It is no secret that some foreign banks in London have started to slowly give notice to workers and plan to re- locate although at the moment the exodus is subdued, as London is a global financial hub on a par with Wall Street. Over the years, the banking and funds management industry became crucial to the British economy, with a trade surplus of £10.2 billion, in the first three months of the year.

It is interesting to note that England exports a high proportion to other EU states and businesses are eager not to forgo access to the Single Market, although it may have reservations on migration rules allowing free movement of citizens. It is expected that Brexit negotiations will start at the end of this year and only when a compromise solution is reached will Article 50 of the Lisbon Treaty be invoked. It stands to reason that Brexit has created an unprecedented amount of economic and social uncertainty. Such uncertainty is exacerbated by heightened terrorist acts perpetrated by the Islamic State in many parts of the world which has a destabilizing effect on business morale.

So it is logical to assume that this negative sentiment may put the brakes on the so-called ‘Dubai-ification’ of Malta as speculators prepare to build at least 25 new towers during the next decade. A number of fully functional upmarket projects will change the skyline of the Sliema and St Julian’s environs. For instance, the Seabank Hotel owner wants to build two towers for his Hard Rock franchise on the site of the Institute for Tourism Studies. Another behemoth is the 6-star complex to be erected instead of the Radisson/Corinthia Hotels and eight new apartment blocks along the St George’s Coast. More is in store to please the eye as Garnet Investments plans a Zaha Hadid creation close by and a tower at the foot of St George’s Road. Two Zaha Hadid towers will be erected over Mercury House in Paceville plus a 15-storey complex behind the Intercontinental Hotel. Adjacent to this new complex will be a 25-storey hotel built by Paul Xuereb; and the St George’s Park complex is planning its own tower.

Will this concentration of high rise luxury buildings be the harbinger of a housing bubble as some economists are warning us not to fall in the trap of a property collapse as suffered in Spain? Brexit can dirty the waters and scare away buyers with deep pockets who can afford to own such properties and in the end switch to other resorts such as London, Singapore, Dubai and Monaco. Will the shy birds referred to as Ultra-High Net Worth individuals who can afford luxury lifestyle developments become risk averse considering the turmoil that Brexit will unleash in the coming years? Will Malta’s passport scheme under the Individual Investor Programme to attract applicants face stiff competition from emerging competitors such as Cyprus and certain Caribbean islands?

One thing is for certain – detailed feasibility studies concerning the viability of high rise projects have been carefully evaluated by developers based on advice from the Big Four audit firms. Developers are confident of rich pickings as the local market is highly liquid and millions will start flowing in to finance such ambitious projects from a rich cornucopia of overseas nest eggs. Just this week two bond issues for €110 million carrying a 4% coupon were snapped in a few hours and were four times oversubscribed. In conclusion, tarred with uncertainty following the Brexit saga one needs a powerful crystal ball to predict the outcome of speculators in their vision to turn Malta into another Dubai in the Mediterranean.