Times of Malta in conjunction with Seed is serializing the economic report Agile. Perspectives on Malta’s economy post COVID-19. The report was authored by JP Fabri, Glenn Fenech, partner and senior consultant at Seed, and University academics Professor Vincent Cassar, Dr Stephanie Fabri and Dr Jonathan Spiteri. The full report can be read here. 

There is no doubt that all economic sectors will be impacted by COVID-19 however with different intensity. We will be presenting an analysis of Malta’s main economic sectors with an analysis of the expected impact. The aim is not to try and predict or quantify the impact but to chart the impacts over a time horizon. 

Construction

In comparison to other key sectors, construction only accounts for 3.8 per cent of the total economy. However, the sector is an important user of services provided by other sectors, namely real estate and professional services such as architects, notaries, tax advisors and financial planners. The sector has had a number of good years in recent times and was growing on average by 5.8 per cent annually.

In terms of direct employment, growth has been rather flat, at a rate of 1.3 per cent annually. Between 2010 and 2018, the number of registered Maltese employees working in the construction sector fell significantly, by around 3,000. Foreigners have compensated for this shortfall, namely third country nationals who today account for roughly 17 per cent of total registered employed in the sector. 

Beyond the numbers, the sector has long been seen as an important economic driver. Over the past few years, the sector has experienced an unprecedented boom with an increase in construction sites, following a laxer approach to the issuance of planning permits. This has fuelled an increase in supply of dwellings, with growing concerns regarding oversaturation in the market. 

Immediate to short run

The construction sector is currently still largely in operation. The current lockdown did not affect the sector, although work did slow down due to increased health and safety measures that are being implemented on sites. In addition, there is a proportion of the workforce that is on voluntary isolation due to increased health concerns. However, although construction is still ongoing, the sales and rental part of the funnel has halted. This is expected to cause liquidity issues in the sector and may result in the postponement of some projects. The linked industries are mainly suffering the brunt of the crisis; these being mainly professional services and also real estate agents. Unless the lockdown directly affects construction sites, it is expected that the sector will experience a limited direct short-term impact.

Medium to long run

On the other hand, the longer the pandemic continues to have a bearing on economic activity, the bigger the impact on the sector will be. Primarily, the sector will be impacted due to broken economic links within the transaction cycle leading to liquidity problems. In addition, as people’s propensity to save increases and sales or rental agreements stop, the tighter liquidity will be. This will impact industry players differently.

The more experienced and larger companies might be in a better financial position to withstand the effects. On the other hand, a number of players will be relatively exposed to the prolonged effects and can face serious challenging conditions. Given the heavy dependency on financing, this sector and its potential impacts needs to be analysed closely given the macroeconomic effect it will create.

On the other hand, intra-sectoral consolidation is expected to happen between operators, with larger players crowding out smaller firms. This further points to the need for the sector to reinvent and transform itself. There needs to be a greater emphasis on quality rather than quantity, together with a greater commitment towards sustainability and championing the environmental sector. Here the focus should be turned much more towards regeneration rather than new developments, as well as the importance of circular economy concepts for the construction industry.

From a macro perspective, the issue of planning and spatial planning, including estimation through demand and supply models, will be critical to ensure the long-run sustainability of the sector and broader economy.

Real estate

In line with improved economic performance over the past few years and on the back of larger numbers of foreigners working in Malta, this sector experienced an unprecedented boom. With stronger demand for properties to rent and an increasing supply of units and new developments to sell, the real estate market went through a renaissance. The sector grew considerably in terms of GVA with an average annual growth rate of just over 5 per cent. Today, it accounts for close to 5 per cent of the total economy. Employment grew at a faster rate at 9.4 per cent however the composition is peculiar to the industry with a high percentage of self-employed and part-time workers. 

Immediate to short run

This sector has been hit particularly hard. Due to health concerns, agents are no longer meeting clients, while demand for new properties has plummeted. The rental market has suffered with landlords being asked to reduce rental rates, thereby starting a broader correction. Sales of new properties have also stalled. As a result, this has brought the sector, characterised by self-employment, to a standstill. This has also affected other professions especially notaries; they too are heavily characterised by self-employment. Incomes have been highly impacted and as yet, the sector is not eligible for Government support. 

Medium- to long-term

The impact on the sector is expected to be far reaching. Demand is expected to weaken over the foreseeable horizon. The ensuing economic recession will reduce the demand for workers, especially foreigners, which in turn will reduce the demand for new properties. The heightened lack of confidence will also impact consumer spending with a larger propensity going to precautionary savings rather than investments in illiquid assets. The correction that will happen in the market, rental and possibly sales, will also impinge on the sector, and consolidation and retrenching are expected. This sector is expected to feel the squeeze of the current crisis well into the medium-to-long term.