The Malta Independent 24 October 2021, Sunday

Landlords and tenants will both gain in stabilised predictable long-term leases – Kurt Scerri

Julian Bonnici Sunday, 28 October 2018, 14:00 Last update: about 4 years ago

The influx of foreign workers, brought on mostly by the gaming and financial services sectors, has had an overwhelmingly positive effect on the Maltese economy as the country continues to see substantial growth. However, all growth has its pains, with the rental market experiencing out-of-control inflation and some Maltese families and vulnerable people suffering as a consequence. This month, the eagerly awaited White Paper on regulation for the sector was launched. Julian Bonnici met Dr Kurt Scerri, the expert in the field who headed the initiative, to discuss the proposals and the effects they could have on the local market.

The white paper outlines the fact that market management is not necessarily detrimental to the free market, with the two main models suggested being a minimum contractual term with periodical rent increases, and longer-term leases through fiscal incentives. Can you elaborate?

The main thrust behind the proposal is to promote longer-term leases as they provide stability to both the tenant and the landlord. Currently, certain estate agents are promoting shorter term leases for landlords as this allows them to revise the rental conditions on a regular basis. This made sense in the context where rents were rising by an average of 30 per cent a year. However, according to information we obtained from leading estate agents and statistics from the NSO, it appears that prices are stabilising.

We have reached a point where the market has inflated, demand has risen in line with other EU countries and it appears that, due to the rising unaffordability of home ownership, the rental sector is expected to grow, yet prices have plateaued. The time is right for the state to intervene and regulate the sector. The landlord already stands to gain in a stabilised market. Short-term rentals bring about a number of issues: you get one month's rent knocked off just in agency fees, you incur maintenance costs and there are gap periods where you stand to lose revenue.

And is there a minimum length of contract you would suggest?

This depends. When we started this exercise we found that there was so much misinformation about the sector that the first objective of the White Paper should be to set out the parameters of the discussion. With regard to minimum statuary duration, it could either be stipulated that a property cannot be leased out for than three years, or it could also be that the minimum duration is set to one year and that longer stays would provide the landlord with fiscal tax incentives, which both produce a higher degree of stability.

In the white paper, we are allowing space for increases, which we suggested can be pegged to PPI and capped at a certain percentage.

So far in our discussion with all stakeholders, we have received feedback that a minimum duration should not be longer than a year, as there are concerns that people would automatically switch to short-term rentals. I do not think this would be the case, but this is the feedback we have received so far. Meanwhile, others have said that a three-year minimum is essential for households that have dependent children, given that they cannot be expected to make annual housing arrangements.

The possibility of a hybrid model has not been excluded.

 

The rise in rental prices has mostly been caused by the influx of high-earning foreign workers, who generally do not want to make such long-term commitments in a foreign country. Given that the market is mostly geared towards them, would the removal of six-month leases be dangerous?

One of the aspects of the model is that it imposes a minimum contractual duration of three months for the tenant, whereby he or she cannot withdraw from the agreement. Beyond that, the tenant can withdraw as long as adequate notice is given to the landlord, which could be between two or three months. It is clear that the housing scenario and employment scenario go hand in hand, but from our studies it appears that the average stay for foreign workers in Malta is between two to four years, meaning that this market has already moved in that direction.

The White Paper also calls for the optimisation of rent subsidy schemes. As we have seen in the past, however, this has often resulted in price increases. Means testing and established benchmarks have been mentioned, with a measure in the budget with regard to subsidies ranging between €3,000 and €5,000 being lifted from this White Paper. Could you provide more details?

One of the issues we found during our research was affordability. How do you deal with affordability? Some were suggesting introducing an index to which initial prices will be pegged. For example, it would say that a two-bedroom apartment in a particular area cannot cost more than a certain price.

There are several reasons for rejecting this imposition. Firstly, the tough experience Malta has had in the past with rent controls meant that it would be impossible for the measure to be well received. Secondly, there aren't even the means to do so, given that there isn't technically a database of rents collected in Malta that goes back a sufficient length of time for the collection of reliable figures. How can you know what rented prices should be in areas that have only recently become a rental area?

International studies have also indicated that the imposition of such controls should be a temporary, extraordinary measure that should only apply in an emergency, as it will only disincentivise future investment.

It would only work if there is a continuously updated list, otherwise there will be a restriction in potential rents which will create future problems. 

The solution was subsidising tenants. The problem was that in the past whenever subsidies where introduced they were ineffective as they were not being incorporated within a legal framework. You had some cases, especially with unwritten contracts, where a landlord would come as soon as he knew that you had applied for a subsidy and revise the agreement.

In the new framework, subsidies will be administered in a much more effective way in a more regulated environment. In the past, the subsidy was around €80 a month, which was increased to €166 when prices started going up. Was it enough? There was an evident shortfall in cases with vulnerable people earning €700 a month but required to pay €800 in rent. 

The criteria should be calculated on the income of the tenant and the rental price, with the government covering the difference. The subsidy would also be capped, in as much as you would not be able to use it on a three-bedroom apartment if you are a single person.

It should be made clear that none of our proposals have come from a creative thinking process. They are not abstracts but systems inspired by foreign models and adapted to the local context.

Affordability is an issue. However, it appears that the White Paper seems to mainly focus on low-income earners, so what is being done to address more middle-class issues, especially with young people?

What we have seen is that problems are being felt by young, single people and those who are coming out of a separation or divorce. In fact, a study carried out by the Parliamentary Secretariat and the Central Bank revealed that, in 2016, a single individual, aged 25 and wanting to buy a property in the cheapest part of Malta would need to be in receipt of a gross annual income of at least €20,000 a year, which exceeds most initial wages. If it is a couple, it would appear to be fine.

On this, the White Paper is suggesting an increase in social housing. There was a delay in building properties as demand grew while the waiting listing for social housing also grew, meaning that the market had become highly saturated while the private rental sector became more orientated to the higher income demographic.

The White Paper is also proposing the creation of a fourth layer to the property market - beyond the rental, ownership and social housing facets - which is affordable housing. This can be done through a PPP or foundation wherein both the government and the private sector contribute to make properties available at affordable prices. We are eager to hear suggestions made during the public consultation as to what the private sector would be willing to contribute towards creating this layer. For the other group, this has been addressed in the budget through the equity scheme.

On that proposal, while it says that a scheme will be introduced for people aged 40 and above who find it difficult to get a loan from a bank, it does not explain further. Can you elaborate?

Basically, what will happen is that a person will be purchasing a property by contributing to the scheme.

It is basically a revamped scheme. What will happen is that a person will purchase a property by contributing half the amount, which will be like an ordinary loan. An agreement will then be made, either with a bank (there are currently negotiations with APS) or the government, who would buy the other half of the property allowing you access to the property market and not require the same amount of capital. The government will always cover the interest. Once the loan has been paid, the tenant can purchase the other half of the property as a right of preference, with the price being locked to the initial purchase, or it could be bought by the government. The tenant would be able to remain an occupant of the property but will be required to pay a social rent.

It should be made clear that the figures will be set later and will be geared towards purchasing affordable properties. The initiative will be launched officially in 2019 and will provide a more concrete and detailed picture.

The issues in the market arise from wages not having developed at the same rate as prices, beyond those working in the gaming and financial services sector. Is the introduction of all these measures just papering over the cracks, given that these people would essentially be in poverty without them?

One market adapts to the other. We have referred to the stabilisation of prices. Why have these stabilised? Even the salaries of those working in the sectors you've mentioned have a limit. There is an impression in Malta that the more foreigners that come here, the more rents will rise, with landlords expecting that prices will continue rising by 30 per cent indefinitely. This is not the case. In reality, housing prices have adapted naturally to wages at the moment. Before it was a tenants' market with low demand and there was a supply of property. Now it has become evident that the growing economy has resulted in renewed interest in the market.

Does this mean that there is a degree of unaffordability across the sector? No, there are several households who are renting and finding it affordable. It is comparable to other EU counties. What is clear is that there is a problem in the lower levels, which is why we are trying to strengthen their economic and financial position by injecting money through subsidies.

 

Another key feature of the White Paper is the registration of rental contracts. However, will this work in Malta, given that there are many in the 'business' who do not even pay tax?

There are two key penalties we are seeing in terms of registration. We know there is an evident culture of non-compliance and of under-declaration. It would have been an incomplete reform had it not foreseen the possibility of landlords who would resist. If the state catches a landlord who is renting a property without a registered contract, then penalties will be imposed. The amount of the penalty still has to be decided, but harsh penalties for those who are non-compliant was a clear direction we received.

The second is inspired by Italian legislation and would give the tenant the possibility to seek a remedy with the courts to impose a contract on both parties if the landlord refuses to do so. The department created within the Housing Authority will assist the tenant in the collection of evidence. This has to be established as it is crucial to ensure a proper distribution of subsidies and incentives.

There is a section which also proposes cases of withdrawal from the contract for landlords. However, these cases, which are the allocation of the property to a relative, the sale of the property, demolition or to carry out certain renovations, seem geared more towards the rights of the developer and unfair to tenants. Should financial compensation be imposed?

These measures were suggested during the internal consultation phase. When we proposed the possibility of medium-term statuary duration, the preoccupation of landlords was what if they needed the property urgently. We discovered that several jurisdictions, including Italy, make provisions for this. As is set out in the White Paper, this could only apply after a minimum duration of a year.

We also learnt that, while the tenant is only technically bound for six months, the landlord was being bound for three to four years. There has to be some sort of symmetry between the parties and  this will only be done through adequate notice for the tenant and in justified cases.

Are there any fears that these clauses could potentially be exploited, particularly in the case of vulnerable people?

This is the sort of thing that will be refined, once the particular model is selected, but we will ensure that the authority will make checks and that documentation will also have to be provided to justify the case.


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