Current Situation Affecting the Development Industry

GRTU Recommendations for Pre-Budget Discussions 2009

Current Situation Affecting the Development Industry

The GRTU, through surveys amongst its members, notes that the current situation in the development industry exhibits areas of concern in spite of a healthy employment scenario and a buoyant, still fragile tourism industry.  This scenario begs a concerted effort by all the stake holders involved.  GRTU notes that the issues involved, although widespread, can be split into 3 main categories:

1. Oversupply in the residential component targeted for first time buyers
2. Stringent banking conditions
3. Indecision by prospective buyers although market correction is taking place

The Oversupply Issue

The current oversupply resulted from different factors:

• Height relaxation and rezoning into higher densities by MEPA
• Repatriation of money
• Low interest rates
• Entry into the property market by inexperienced developers (mainly attributed to forced bartering practice)

Stringent Banking Conditions

GRTU notes that the loaning situation vis-à-vis the local banks has drastically changed from a relaxed approach into a very cautious one contributing to a lower affordability across the board, also driven by high interest rates.  This reflects the global turmoil in financial sectors.

Indecision by Prospective Buyers

GRTU notes that the downward market correction vis-à-vis property prices and Government indecision on electoral promises regarding housing still to be delivered is sending out wrong signals to prospective buyers who are playing the waiting game.

Recommendations to Avoid Hard Landing

1. Given the available housing stock Government should grab the opportunity to redirect public money (approximately Lm9 million) envisaged for the construction of 300 odd social housing units to more appropriately targeted incentives.

There is no need to invest more money in social housing.  Currently there are

good prices on the market and their availability will continue for the next 3-5

years.  If more money is invested on housing, this will continue to kill the

property market and create an economic crisis.  In certain cases the prices given

by the Housing Authority are higher than those given by thee private sector.

1. Allocate funds for the introduction of the pre-electoral promise re: shared ownership scheme.

Government promised to give Lm10,000 per couple to first-time buyers and even though GRTU understands that financial problems may arise, money used for social housing can be redirected and used for this scheme.  Boosting this scheme would result in increased sale of property, removal of stagnation and the end of apathy regarding the waiting game.

1. Incentivise the rental and emphyteutical concessions by introducing a flat tax rate to owners.

GRTU has been emphasizing the importance of this concession for a long time as it is the way forward for movement in the rental market.  From studies carried out, there is lack of agreement in the Cabinet regarding this issue, from fear that there will be a precedent from revenue on income tax.  Government must separate revenue on investment from revenue on income or trading.  Revenue from property is revenue from investment and not trading.

1. Moreover, incentivise the rental and emphyteutical concessions by introducing tax credits to first time buyers for a given number of years.

Tax credits should be given to buyers who decide to rent property instead of buying it.

1. Extend the 5 year option granted on final withholding tax to 8 years.  This is intended to save substantial numbers of developers from a serious credit crunch.

Pre-entering into EU there was a boom in property prices which affected prices in land.  Although it was a good move to introduce a 12% final withholding, GRTU recommends that this flat rate should be reduced.  For those who are paying 35% on a project revenue, we recommend an extension from 5 years to 8 years as the market is going through a deflation period so to avoid a credit crunch for a number of developers who acquired land at a very high price.

1. Elimination of double taxation in connection with final withholding tax on VAT payments.

Developers pay VAT on furnishings and improvements and another 12% on them when selling.  This double taxation is unfair and should be removed, in accordance with European Law.

1. Final withholding or capital gains should be paid on the real selling price ad not subject to Government's architects' valuation.

GRTU notes that architects representing the CIR are sometimes inflating the market, with buyers receiving unnecessary fines.  In many circumstances, the vendor is forced to sell, sometimes due to pressures form the bank, and has to do so according to prices dictated by the market.  Until a solution is discussed between GRTU and the Department, the final price should be that declared in the contract, especially if the convenjum is registered beforehand.  This should only apply to capital gains tax and not the stamp duty.  For example, why does a person who needs to sell at under market value (very subjective) have to be fined when making a bad deal?  We understand that the purchaser who is making a good deal should pay the difference on stamp duty but definitely regrets to agree that a seller will be fined when he is forced to sell at a buyer's market price

1. Set up task force made up of the relevant stakeholders to examine practical ways of addressing excess supply of housing units through the introduction of mixed use zoning given the current demand for commercial/office uses.

There is a real demand for property, which is not a nuisance to neighbouring residents, such as offices, small showrooms and other commercial premises that need not be in main roads and which cannot obtain necessary permits due to restricted residential zones.  GRTU realizes that there is a large supply of property in residential areas and recommends that Government or the Cabinet to issue a legal notice in this budget to permit commercial operations to run from these premises (but not industrial operations).  This would also stimulate the economy in the property industry.

1. Tap the buoyant tourism market to promote the investment of foreign money in targeted areas of housing surplus.

Until now it seems that attraction from foreign investment has taken place in designated areas.  GRTU believes that there is the possibility of sale of property in many more areas around the island and there should be good marketing in this regard.

1. In view of the Energy Directive, the Government should set up a fund to aid stakeholders in its implementation.

Until now, competent authorities including architects, engineers and MEPA have not yet shown clear guidelines what are the necessary requirements regarding Energy Directive imposed on new structures.  Developers are still building according to the technology and structure of the architect, in conformity with MEPA.  It appears prima facie that certain requirements cannot be met let alone be implemented.  This is why, regarding the Energy Directive issue, there should be a greater effort for full coordination so that everyone can understand exactly what this Energy Directive is.

1. To tackle indecision by prospective buyers, GRTU strongly recommends a 6 month moratorium on the payment of stamp duty on property purchased by first time buyers.

GRTU recommends that Government gives a 6 month concession period to first-time buyers including foreigners so that they are exempt from stamp duty on prices up to Lm50,000.  This would effectively kick start the economy in property transactions, tempting buyers get out from the waiting game thus removing fear and uncertainty.