Property developers often believe their investment is the fastest and easiest way towards wealth and that, at worst, a ‘soft landing’ for the market would result.
Banks traditionally financed property investments wanting to grow their balance sheet. Still, property development is increasingly being funded through the official debt market, where thousands of small, inexperienced investors often fail to understand risk pricing.
Massive overvaluations of property are among the foremost harbingers of an asset bubble. So, is the property market, especially the commercial sector, facing the risk of a bubble burst?
According to property experts participating in a panel discussion organised by the Malta Business Network, the supply of offices in the country is showing signs of outpacing demand.
PwC Malta director Angelique Spina argues that despite “exponential” growth in Malta’s commercial property market in recent years, driven by the gaming and financial services sectors, high inflation and interest rates have led to stakeholders questioning the market’s future.
Market shifts often arrive in three distinct phases: denial, migration, and panic. Denial of a worsening trend in the property market has been evident for many years. Migration occurs when increasing numbers of investors navigate to the opposite polarity – withdrawing from the market. There is still little evidence of this happening today. Panic is when everyone runs to the exit at once. Hopefully, this phase will be avoided.
There are various reasons behind the overheating of the property market. A profound shift in the use of mostly offices and retail spaces dominates the commercial property landscape. The pandemic, with its resulting lockdowns, served as an epiphany for many workers, especially those working in the growing services sectors of the economy.
Many office workers realised the feasibility of working remotely without the accompanying daily expenses and the growing frustration of driving on our congested roads. Employers are also downsizing their office space to save on rent and maintenance costs that are escalating.
It is unlikely to see a shift back to less remote and more office work. International business surveys indicate that by 2025, remote work will be embraced by nearly a quarter of workers, suggesting that even less office space will be needed. The new norm in the commercial property market risks leaving vast office spaces underutilised or unused yet still accruing costs and foreshadowing the erosion of value.
Due to the pandemic, retail spaces also faced lower demand as homebound consumers relied more upon e-commerce for their daily needs, prompting new business creativity.
A domino effect could ensue: bankruptcies, strategic defaults, sell-offs, layoffs, and the government possibly using taxpayers’ money to rescue inexperienced investors in the debt market from fatal financial distress.
It is time for commercial and residential property market investors to stop denying the seriousness of the risks they face. Policymakers, especially the Planning Authority, must insist that developers adhere to a sound investment philosophy not tainted by the speculative illusion of quick returns with negligible risks.
Even more important, the debt market should apply stringent conditions on property developers’ public offerings.
Financial regulators must ensure inexperienced small investors are not fooled into buying debt instruments that can destroy their hard-earned savings.
Stakeholders in the property market need to recognise when something fundamental has shifted such that things are not likely to cycle back as they usually do. Office property is a good example.
Remote work has fundamentally shifted how we produce and deliver certain goods and services. The property market may be facing a secular decline – a trend that is likely to continue moving in the same general direction for the foreseeable future.