Interview | Wednesday, 13 May 2009

Recession? Bring it on

In the local property business, Chris Grech was the first to come up with the standard remuneration model and inspection rights for property consultants. His guidelines have nowadays become standard practice in almost every estate agency on the island. Coming back to Malta from the US in the 1980s, Grech gives the property business a go and sets up Dhalia. His decision pays off and how. But how is he dealing with the dreaded recession at this moment in time? Interview by DAVID DARMANIN

How have you become interested in the property business? How did you become convinced that it was the right path to take in your career?
In 1982 I worked as a psychologist in the United States. I had come down to Malta because my brother Mark had convinced me to set up a real estate agency here, so we started off by taking over a flower arrangement company called Dahlia, which was owned by my mother. We changed the name to Dhalia, removed the flower from the logo and started operating in 1983. We did so well that by 1985, we started developing property ourselves. The firm kept growing steadily ever since.

Your family is involved in the property business running different companies. How does this work?
By 1996, my brother retired and I took over the company myself. But way before we dreamt of setting up Dhalia, in 1962, my father opened the first Maltese-owned estate agency – Grech Alexander. Nowadays this company is used for our group investments. My sister has her own estate agency, Sarah Grech. All the family is quite into this line of business really. I happen to be very close with my sister and I am very proud of her achievements. Besides setting up a really strong business for herself, she also managed to raise three wonderful children – something which I would have never managed to do so well. In the family, I was perhaps more inclined on the entrepreneurial side, because I invested in other business activities.

How have you diversified?
I diversified in different ways over the years – entering as a silent partner in restaurants, tourism and retail establishments in Malta. I was also involved in manufacturing, not only in Malta but also in Russia. My biggest step outside real estate was the setting up of Bay Street, which is where I focused most of my energy until recent. My focus nowadays is mainly on an investment I made in an apartment complex in Bulgaria.

As soon as you were seen doing well with Dhalia, many other estate agencies mushroomed all over the island. How have you retained your dominance in the market?
Our strength has always lied in giving excellent service and focusing on the needs of a wide market segment. We opened offices everywhere on the island, and we catered mostly for the middle class, which we can also call ‘the mass market’. We never gave priority to selling a smaller number of higher priced properties, but rather respond to whatever is requested by our very wide portfolio of clients. Other estate agencies found their niches in specific markets, and they could only work in such areas because by the time they opened we already had an infrastructure which they were not able to build up on day one.

You set up Bay Street against all odds, and yet the complex turned out to be a success story. What hurdles did you come across with?
Bay Street was an excellent example of how we changed trends in Malta. We set the complex up at a time when, at the turn of the century, in Malta we had not yet noticed that retail was very much linked to leisure. With Bay Street, we introduced this culture to the island, although it was already present in many other countries across Europe. Retail and leisure are nowadays accepted as two industries going hand-in-hand, as can be seen everywhere else in Malta now – starting from the Valletta Waterfront, MIDI and Republic Street itself. It took us two years to build up Bay Street but we did it, and it’s doing very well.

How has the recession affected property in Malta?
In today’s economic climate, we face the issue of affordability and a dwindling demand for apartments. That said, demand for specific types of property may disappear even when the property market is at its peak. Just before the year 2000 for example, farmhouses were very popular. You’d be amazed at how, all of a sudden, these became very unpopular as the vast majority of buyers were asking for apartments. Reacting to the demand, everyone became a developer and every developer built apartment blocks. What we are experiencing now is an oversupply of apartments due to the boom we witnessed in recent years. Coupled up with this is a reduced affordability among buyers, so the market is correcting itself. As Dhalia, we are extremely excited at these times of opportunity as we observe a market that is still spreading in spite of the difficult times. We now see less developers constructing, but many more paying attention to quality and detail. What we have here is not a bursting property bubble, but rather a sector which is due to improve thanks to the effects of a recession. Gone are the days when you put a badly built development on the market and it sells anyway. Many thought that the growth we were experiencing was unstoppable, but the recession is bringing developers back down to earth.
Today’s developer is much more flexible to the needs of the buyer. Because over the last 10 years, property essentially became a seller’s market – some developers turned into cigar toting speculators and became arrogant. This is clearly changing.

Where are the new areas of growth in property during these rough times? What is selling?
We are now seeing a very encouraging improvement in property rental. Turnover from rental markets has doubled over the past four years. Our challenge in this area is that we have a short supply of good properties up for rent in central areas. With the influx of foreign companies in Malta, demand for rental of nicely done apartments at affordable rates has really increased, and it is not always easy to keep up with it. Banks have in fact launched schemes aimed at helping investors purchase property to put them on the rental market. This is very helpful, especially when seeing that they are offering reduced rates.

Aren’t Maltese property owners generally wary of renting out property?
With the new rent laws in place, tenants are not overly protected as they were before and in time, Maltese property owners understood the advantages of renting out. Seeing the number of properties being rented to Maltese tenants in recent years, we seem to be undergoing a culture change in this respect.

What do you want to see improved in the property sector?
One of my biggest frustrations in property over the last years has always been the mentality of not allowing foreigners to purchase property in Malta. Over the past 10 to 15 years, we have heard politicians talk about restricting the local market to foreigners in order to protect prices for Maltese buyers. The reasoning behind this was to protect the local community from prices shooting up due to offshore demand. But this has clearly not happened and this theory has been proven wrong.
What came out of this approach is very clear for us to see: many foreigners bought property in other destinations such as Spain, Morocco, Croatia or Cyprus – where let’s face it – the product is of a very high standard. In these countries, properties and areas which are popular among foreign investors have very good facilities – be it for leisure, transport, open areas, golf courses and natural sites.
In Malta we have a distinctly unique product – starting from our lifestyle to the beauty our country offers. The problem is that we lack infrastructure in certain areas, apart from the fact that we have become relatively expensive. What we must do in these challenging times is clearly to source up-market buyers from overseas – and this can only be done by improving our product and marketing effectively, same as with tourism.

Are we saying that the Maltese and foreigners tend to look for different types of property?
There is still a healthy market for properties worth €100,000 to €200,000 as these are generally bought by the local community whether for rental return or for residential use. But for the major upcoming luxury developments and also for those which are already built – it is vital that we promote Malta as a destination and bring in foreign investment. It is high time for the authorities to start looking into this area and make an effort.

So would you be of the opinion to remove the system to designate special areas where foreigners may purchase favourably?
The idea behind Special Designated Areas (SDAs) is not fair. It should be easier for foreigners to purchase property here – be it in an SDA or otherwise. What our economy needs at the moment is foreigners investing money in Malta, and property is one way of doing this effectively.

We know that many of the luxury apartments sold have been bought on a promise of sale agreement for investment purposes. Many of these properties would be intended for resale to foreigners looking for a second home in the Mediterranean. With property prices crashing in Spain as well as in other countries competing with Malta, are you not scared that if these apartments aren’t sold, developers will be facing unaffordable loan repayments to banks?
I think the promise of sale agreements which had to drop have dropped already by now. We have been witnessing a downturn in this area for the past six to nine months already now. Over the past four months, some buyers have in fact dropped out of their promise of sale agreements. This is mainly due to the fact that the local market for up-market properties has been exhausted. This is exactly why we need to source foreign investors and remove restrictions for the benefit of the economy. If we manage to bring this about, one can only expect a positive snowball effect on restaurants, retail operators and the national coffers.
That said, we must also make sure that foreigners investing in Malta have space for their boats here, as well as the necessary infrastructure required for Malta to be a truly attractive destination.

And what about the effect of unsold property on banks?
At the moment, banks are being very selective on the reasons why money is lent out when it comes to the purchase of property. At the moment, banks are promoting loans for property intended for direct residential use, or for rental return. They are seeing these areas as ones carrying very low risk.
Because there was a time when banks lent out to a large number of buyers and developers, one cannot deny that they have witnessed some bad debts themselves – but these are repercussions brought about when the market is correcting itself.

In view of the situation where property sales are witnessing a slump, would you shy away from investing in more property at the moment?
I will not stop investing in property myself. I have recently invested in the development of 18 apartments in Xemxija and 100 others in Balluta.
The property market is divided into many segments, so it is difficult to say that property sales are suffering in general. Property in segregated areas like Madliena, San Pawl tat-Targa, Lija, Attard, Balzan and even Valletta for example – have not gone down in price. The properties selling nowadays are the well-designed ones, whose development was made with care and attention to detail.
The mentality of owning property for investment will not be changed by any recession. It is impossible. The challenge is now to turn over up-market property – and this is not so great a deal after all. But we need a corporate approach to selling Malta as a viable destination to countries in Northern Europe, South Africa and the United States. We see the effect of such efforts from the little marketing we do ourselves. Besides promoting the property, we promote the entire destination – and that is how we sell effectively.

Why do property consultants have a bad reputation?
I think it would be false to say that property consultants have a bad reputation. It is true though, that some step out of line – and this happens in every estate agency.
It takes time to come up with a team whose individual members have their own networks and good reputation in the field. Some people end up building a bad reputation, and in a matter of a year or two, if they are allowed to operate they can end up giving a bad name to the agency they work for and all its consultants. It is the responsibility of management at any agency to ensure that whoever steps out of line will no longer have the opportunity to do this again – and I think we do this very well at Dhalia. We had our bad moments in the past, but I believe that we dealt with them in the right way. We also have a corporate chairman, Franco Valletta, who has what it takes to see to every single property consultant in every single office. I think he does a hell of a job, better than how I would have done.

Are you interested in financial services?
Very much so. The market is changing and so is demand. We are looking into this area and there is definitely scope for people to invest in property by means of financial services. Bought at a good price, a good property provides a good return – and this is also the way it works in financial services – so there are a number of ways of how these two areas can work in tandem.

Have you thought of succession? What are your views on the model of companies being passed on to the next generation within the family? Are you interested in floating Dhalia shares on the stock market at some point?
Possibly yes. The financial sector is very interesting. But I also believe in strong partnerships where there is active participation and the parties can learn from one another to lead a company into further growth. I do not think business models should be passed on to future generations without giving them any other choice. I think younger generations should be allowed to do what they like, and our business should be there to work as a platform for them to be able to develop the careers they choose to pursue.

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13 May 2009

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