PKF – a study linking future supply and demand for luxury properties

In recent years, the property market has seen lots of exciting property developments which has translated into better infrastructure that improved the

Supply of new properties has always been considered to be limited as, due to permit regulations and building constraints, supply of properties cannot be increased in the short run. However, in the past three years this phenomenon has changed remarkably, as seen by the rapid increase in developments particularly in the luxury real estate market. While property developments previously used to take years to complete, today property developments are taking less time to complete due to advances in building technologies. On the other hand, demand for properties accelerates in the short run due to volatility in economic variables. In an ideal market clearing condition, demand is expected to meet supply to achieve maximum satisfaction. When this fails to happen, a mismatch is created.

In line with traditional Keynesian law of demand and supply, any mismatch between the quantities demanded and supply of a commodity, causes a price change for the same commodity.

PKF Malta together with a major real estate agency in Malta has concluded a detailed study on the current situation concerning luxury properties. The study aims to hasten the current debate about the sustainability of the luxury residential and commercial property market, particularly following recent announcements of a number of large-scale developments which are either already approved or in the process of being approved by the Planning Authority.

Will the market be able to sustain the increasing demand year on year? Will supply of new builds meet the projected future demand? Talk of a bubble has been dismissed by most estate agents saying this is nothing but scaremongering. Nobody dares mention the word “bubble” when referring to the burgeoning luxury property sector. It is a sacred cow. This sector has seen estate agents, notaries, banks and government extolling the rich harvest on a sector over which the sun never sets. Obviously, politicians like us need to make hay while the sun shines and with the advent of Brexit next year, who knows if there may be unsavoury consequences. While the bonanza flows from the sweet chalice of those enjoying the ride on the property gravy train, nobody dares write about the excessive escalation in land prices. This could fuel a pervasive result in the competitiveness of the housing market. Can we conclude that developers’ risk appetite is kindled by the unprecedented sanctioning of building permits pertaining to premium sites?

High-end properties currently in Malta can be categorised into either commercial or residential spaces and using a number of simple assumptions, the method used by PKF tried to reduce both categories to a common denominator. This way, one could measure the extent of the mismatch (if any) between the supply and demand for high-end properties over the coming three years.

One notes that the average high-end property consisting of a three bedroomed apartment is typically priced at an average of €1.3 million. For simplicity, it is also assumed that a typical office unit consists of 400 square metres, whilst a typical highend apartment unit is around 180 square metres. Desktop research was used to arrive at the volume of projects submitted for approval to the Planning Authority. Using this data, our team projected the potential number of luxury units approved for each high-end project, for the years 2019 to 2021.

On the other side of the coin, we assessed factors which can potentially contribute to the demand for such properties. It goes without saying that this principally originates from high net worth individuals, including but not limited to individuals who take up the IIP scheme. This is apart from local demand for buy-to-rent properties, foreigners both visiting Malta for leisure and/or business purposes, as well as from new foreign direct investment. The latter reflects the efforts by Malta Enterprise to attract and approve new inward investment. Using publicly available information and a number of reasonable assumptions, the demand for high-end units for the next three years was quantified.

George M. Mangion The study shows that demand for residential high-end properties exceeded supply in 2019; however, this trend is reversed for the subsequent two years - in 2020 and 2021. One cannot be dogmatic on this interpretation as this conclusion depends on a number of exogenous factors.

By definition, a property mismatch starts with a continuous increase in housing prices, which is fuelled by a significant increase in demand in the face of restricted supply. At one point in time, two things may take place which could push property prices on a downward spiral; either demand will decrease or supply for properties significantly surpasses the demand. If and when this mismatch prevails for a sustainable period, this could result in an unexpected correction in prices leading to what is called a property crash. A typical example happened in Dubai coinciding with the years following the US subprime crash in 2007.

One usually observes that rising prices for high-end properties could be the stimulus that drives speculators hoping that prices will continue to escalate. This is a high-risk situation. Over time, more people realise that market prices exceed fundamental values, so they quietly withdraw from the market. This triggers a correction and in some extreme cases leads to an abrupt slump in prices. Banks may start to tighten on non-performing property loans and exacerbate the pain for slow paying developers. Unemployment in the construction sector sets in.

As any economist would predict, this process is expected to continue until the market reaches its equilibrium point and is able to stabilise, thus culminating in a fair market price. One would only hope that stabilisation of the market will not jolt the market fundamentals and create a race to the bottom with too many sellers and few buyers. There has been a lot written on social media complaining about the meteoric rise in rents due to a sudden gentrification phenomenon. As landlords expect more economic rent for prime properties, this has the effect of scaring away tenants, even those who can afford to live in quality accommodation. The pincer movement of rising rents fuelled by the perceived concept that foreigners can afford such rates may in the end result in making us uncompetitive as a centre for FDI. In conclusion, PKF welcomes the comments of readers who wish to express their arguments on this survey. Certainly, there are a number of unknown factors that cannot be measured scientifically to arrive at a true assessment of the state of the luxury property sector. More studies are required to accurately predict the trend of price escalation. One hopes that the principal stakeholders remove blinkers and plan for an orderly stabilisation of this important part of our national economy.