More red carpet and less red tape

Published on The Malta Independent¸ issue 14 August 2011

With the shock news of local bank shares shedding €110 million in value¸ investors are questioning what a safe shelter for their savings is. This year has witnessed investors protesting against the fall of the La Valette Property Fund managed by a Bank of Valletta subsidiary¸ which lost €50 million in value (amazingly¸ no generals lost their command). More bad news followed with the fall of the dollar denominated investments and the debt-stricken eurozone countries. They say that gold remains the only safe investment as it looks like the only tried and tested safe haven when uncertainty hits the markets (gold topped the 1800 mark). Locally¸ we have been accustomed to look on investments in brick and mortar as an equally safe haven. Many bought expensive second homes in premium areas as a hedge against falling currency values.

In fact¸ this was fuelled by the cash of repatriated millions of foreign undeclared nest eggs¸ lured by successive government tax amnesties. Lucrative development in property has traditionally been the playground of the landed barons (essentially the politically well-connected business tycoons) in the past decades. Quality real estate in Malta has withstood all turmoil in the recession and¸ with some minor exceptions¸ prices remained stable. It is true that estate agents admit suffering a small correction in the aftermath of the Lehman collapse¸ but really and truly the property bubble supports a pseudo price equilibrium with some banks heavily loaded with advances¸ having property as the sole collateral.

It is surreal how a standard 3-bedroom apartment (with sea views) in Tigné Point carries a minimum €1 million price tag. Not bad¸ considering that developers acquired pubic land at a negotiated price with an option to pay the government over 20 years. But then any speculation linked with mega projects is well thought-of by any party in power (and Mepa) as it always generates jobs and is perceived to have a healthy multiplier effect on the economy. The government also makes a profit as it has imposed an ingenious stamp duty on property buyers and levies tax on capital gains at 12 per cent¸ which is payable on contract by the sellers (a deferred 35 per cent tax is optional when terms and conditions apply). With this background one can understand how a permanent resident scheme (currently suspended) attracted many foreign high net worth individuals to invest in real estate. Before its sudden and unexpected suspension¸ applicants were paying a nominal flat tax of 15 per cent on remittances. They were expected to either rent or acquire property. It is lamentable that the criteria which established the scheme 25 years ago has not been updated.

Participants were expected to spend more than €23¸000 a year¸ buy a permanent residence of more than €69¸000 for an apartment or €116¸000 for a house¸ or rent for €4¸000 a year. Up to the time before its suspension¸ there were 1¸042 permanent residents¸ of whom more than 50 per cent paid less than €4¸000 individually and 90 per cent paid less than €10¸000. Statistics showed its popularity was waning as only 14 had bought residences last year. Some buyers of real estate achieved permanent residence status and then sub-let to others when they moved on. The government is contesting the effectiveness of the P