The Impact of Brexit on the Maltese Real Estate Market: Brexit and Property Investments in Malta

Brexit, the UK’s withdrawal from the European Union, has had far-reaching consequences across various sectors, including real estate. Brexit has impacted the Maltese real estate market, leading to inflation, shifts in property demand and increased interest in commercial spaces. As we explore its impact on the Maltese property market, it’s essential to understand the potential consequences for property investors and stakeholders. Let’s delve into the specifics and get a better understanding of the current situation.

Understanding the Current Landscape

The Maltese Real Estate Market

Malta’s property market has been experiencing steady demand, driven by several factors, such as Malta’s economic growth. Malta's economic growth has been robust, with real estate prices, increasing by an average of 5% per year. This percentage is aligned with the European Union average. Moreover, other factors include the attractive lifestyle that Malta offers. With its Mediterranean climate and rich culture, Malta provides a desirable lifestyle for both locals and expatriates. These aspects contribute to the appeal of investing in property in the country.

The limited availability of land in Malta, particularly in areas close to the capital, Valletta, is a significant challenge for real estate investors. This limited land supply drives up demand for properties, making them highly sought after. For example, a coastal apartment in the northern harbour of Valletta can cost a minimum of €740,000 for a 176 per square metre space . Additionally, foreign investment in Malta's real estate market is also a significant factor driving its growth. Compared to major global cities like San Francisco, where real estate prices reach €11,000 per square metre, and London and Shanghai, each averaging around €16,300 per square metre, Malta's average residential property cost of approximately €3,000 per square meter is quite appealing. This affordability makes Malta an attractive option for foreign investors and individuals looking to reside in or invest in profitable properties.

To meet the demand of foreign buyers and investors, Malta has established Special Designated Areas (SDA) that offer more favourable acquisition conditions and regulations for non-EU Malta residents. In one of our blogs, we explain in detail about these areas that allow foreign investors to buy multiple properties to either live in or else use as an investment opportunity. The process of purchasing a property in Malta typically takes around 6 months, making it more convenient for foreign investors to enter the market. The strong demand for property in Malta is further evident through the number of property transactions in recent years. In 2022, a total of 14,000 properties were bought in Malta, with the average cost for a house or apartment estimated at €227,000. Moreover, the rental market in Malta has also experienced significant growth. As of June 2023, the number of registered rental contracts stood at 54,978, indicating a notable 24% increase compared to the previous year. The significant growth in rental agreements highlights the ongoing demand for housing options in Malta.

Additionally, to further meet the evolving preferences of buyers and tenants, the property market in Malta has been witnessing a shift towards modern and sustainable living spaces. There is an increasing demand for energy-efficient homes and eco-friendly features, as individuals value environmental factors and sustainable practices more and more when deciding on property. To support and incentivise property ownership, the Maltese government has implemented various schemes and plans. These schemes aim to assist first-time and second-time property buyers, promote property investments in Urban Conservation Areas, and provide refund schemes for restoration expenses. The goal of these initiatives is to create a favourable environment for individuals looking to invest in real estate in Malta. Overall, the steady rise in property transactions, the growth of the rental market, and the focus on modern and sustainable living spaces are all indicative of the strong demand and positive trends within Malta's real estate market.

Construction Activities

Due to the rising number of foreign visitors, the construction sector in Malta is experiencing active growth. The focus is particularly on expanding the housing stock in urban areas and tourist hotspots. Several developments and projects highlight this trend and demonstrate the commitment to high-quality developments and sustainable growth in Malta.

Areas of significant growth are in tourist accommodation; places such as Sliema, St. Julians, and Pembroke are popular. Malta has seen a surge in applications and permits to build hotels, often as part of mixed-use developments that include residential, retail, and office components. This approach caters to the demand for diverse and integrated spaces. A study conducted by Deloitte Malta for the Malta Hotels and Restaurants Association (MHRA) estimates that Malta would need to welcome around 4.7 million tourists annually to attain an 80% occupancy rate for the current and planned hotels. In 2023, the total number of tourists amounted 2.9 million, which is a 30% increase compared to 2022. This significant growth indicates the rising popularity of Malta as a tourist destination. This trend continued this year; in April 2024, the total inbound were estimated at around 306,000, which is an increase of 14,8% compared to April 2023.

Other trends, such as Regeneration projects, are also a priority, particularly in historic urban cores. These initiatives aim to revitalise areas while preserving their cultural heritage, which is crucial for maintaining the tourism appeal of cities like Valletta, Mdina, and Cottonera. By combining preservation with modern development, these projects stimulate the overall attractiveness and sustainability of these areas. To balance the development process with the quality of life for residents and visitors, construction regulations are agreed on. Demolition and excavation works are prohibited in tourist areas during the summer months, from June 15 to September 30. This coordinated effort between the Building and Construction Authority (BCA) and the Malta Tourism Authority (MTA) aims to mitigate the inconvenience of construction sites on tourism and residents. These regulations ensure that construction activities do not disrupt the experience of tourists and the local community during the peak tourism season.

These initiatives and regulations are great examples of the long-term vision for high-quality developments and sustainable growth in the construction sector in Malta. By expanding the housing stock in urban areas and tourist hotspots, Malta aims to align with the demand while preserving the unique characteristics and attractiveness that the country has to offer.

Attractive Investment & Residency

Malta has emerged as a prime destination for foreign investors, expatriates, and retirees seeking both the allure of island life and the benefits of a solid investment. The Maltese real estate market stands out for its favourable conditions, strengthened by several incentives aimed at attracting foreign investors. One of the most notable advantages is that Malta’s tax regime incentivizes property investors to invest in Malta over its European counterparts. With a favourable inheritance tax focusing on immovable property transfers and a property tax system that’s more lenient than many of the other European countries, the island offers an attractive fiscal framework for investors looking to maximise their returns.

One way to invest is through Malta’s relocation programme, the Malta Permanent Residence Programme (MPRP), which provides investors with an excellent opportunity to access Maltese residency rights. By investing a minimum of €300,000 in property in the southern regions of Malta, or anywhere in Gozo, or €350,000 elsewhere, non-EU investors can acquire permanent residence rights in Malta, enabling them to enjoy the natural beauty and lifestyle that the island has to offer. For investors seeking even deeper ties with the island, Malta's Citizenship by Exceptional Services by Direct Investment Regulations offers a path to citizenship, followed by a minimum period of residence of either 12 or 36 months. Under this option, a real estate investment of at least €700,000 in a qualifying residential property, together with a number of other commitments, allows investors to have the privilege of calling Malta and Europe home, along with the set of benefits and rights that come with Maltese and EU citizenship.

Under the Citizenship by Direct Investment programme, investors and their dependents gain access to visa-free travel to over 180 countries worldwide, including the United States, Canada, the UK, and across the EU, with the added ability to do business across the European Union. Benefits of Citizenship by Investment include health and security advantages, economic opportunities, and a high standard of living, which Malta is well-known for. Moreover, investing in Maltese real estate provides investors with the assurance of the long-term potential value appreciation of their investment, making it one of the most attractive investment opportunities on the market. For more information about these or other programmes, feel free to reach out and plan a free consultation meeting.

Moreover, the Malta Permanent Residence Programme (MPRP) does not offer any tax grants or incentives but rather subjects participants to standard Maltese statutory tax provisions. As per the Residency Malta Agency official FAQs at the time of writing, the basic statutory provisions lay down that Maltese tax for non-Maltese-domiciled individuals is imposed on:

1. All chargeable income and capital gains arising in Malta, and on chargeable income arising outside Malta that is remitted to Malta in the case of an individual who is resident in Malta,

2. Only chargeable income and capital gains arising in Malta in the case of an individual who is not resident in Malta.

Individuals with specific rights under the Status of Long-Term Residents (Third Country Nationals) Regulations and the Free Movement of European Union Nationals and their Family Members Order are exempt from the standard tax provisions and remain subject to worldwide taxation. However, as the Malta Permanent Residence Programme (MPRP) does not grant these specific rights, holders of MPRP status should generally follow the basic tax principles mentioned earlier.

Additionally, for Malta’s Citizenship by Exceptional Services Regulations, even if individuals are naturalised as citizens of Malta, foreign capital gains, even if received in Malta, are not taxable in Malta if the individual in question maintains either a non-resident non-domiciled or resident non-domiciled status in Malta for tax purposes. Non-residents and temporary residents only need to pay tax for capital gains and chargeable gross rental income arising in Malta. However, if someone is married to any ordinary resident or domiciled person in Malta, the clauses will be different. This tax advantage makes Malta an attractive destination for foreigners seeking fiscal efficiency.

Impact of Brexit on Property Investment

The Maltese commercial property market has long been a preferred destination for UK investors due to Malta’s strong historic ties with the UK, as well as the country’s advantageous location, strong legal system, and property tax implications. However, post-Brexit, there have been potential shifts in investment patterns and inflation rates that have reshaped the market dynamics in Malta.

According to Finance Minister Clyde Caruana, Brexit has played a significant role in the rising cost of living in Malta. The country's heavy reliance on imports from the UK resulted in duty issues following Brexit, leading to an automatic increase in prices and subsequent inflation. Additionally, in 2022, the UK market share in Malta was recorded at an impressive 6.3%. To see how inflation affected the real estate market, we dove into the numbers.

The global inflation growth in the first half of 2022 contributed to increases in the prices of various goods and services, impacting Malta as well. Consumer prices in Malta surged from an average annual rate of 0.7% to an annual rate of 6.8% in July 2022, leading to a rise in property prices. This inflation also led to higher charges for building materials and machinery, resulting in a 30 to 40% increase in construction costs, equivalent to an average increase of €10,000 to €15,000 per apartment. Consequently, asking property prices increased by 4.0 to 6.0%, without factoring in other potential increases such as the cost of land, marketing, and estate agency fees. As a consequence of the surge in property prices, combined with overall inflation, buyer affordability has been impacted, as reflected in the Housing Affordability Index (HAI) for Malta, determined at 76.4%. This indicates that households earning the median income would only be able to borrow 76.4% of the financing required to purchase a median-priced apartment.

Brexit has contributed to the expected rise in real estate prices in Malta, making the country's investment environment more attractive amidst rapidly rising inflation. This makes Malta an even more attractive option for Britons who are looking to relocate there despite Brexit. Predictions from the European Commission indicate a decline in inflation for 2024 and 2025.

Moreover, Brexit has undeniably altered the landscape for UK investors in Europe, with British investors now treated as non-EU nationals in Malta. This has impacted the strategies of British investors. However, Malta has made efforts to maintain strong ties with the UK and has chosen to uphold most pre-Brexit regulations, mitigating some of the negative impacts. The proactive approach of the Maltese government, such as offering financial instruments to local companies trading with the UK, demonstrates a supportive environment for continued investment.

The Maltese real estate market experienced a significant transformation due to changes in inflation rates and investment patterns following Brexit. Brexit has played a role in the effect on Malta's inflation and increasing cost of living, especially when it comes to the property market. Malta is still a desirable place to invest despite these developments, even though there have been some adjustments for UK investors. The Maltese Government's proactive actions suggest that, despite the disruptions caused by Brexit, Malta's market maintains its attractiveness.

Commercial Property

The commercial property market in Malta has experienced a notable transformation in tenancy agreements. The prevailing uncertainty stemming from Brexit has prompted businesses to reassess their leasing strategies, leading to a measurable shift towards short-term lease arrangements. This adjustment is evident, especially among businesses, which are increasingly opting for flexibility to navigate potential market volatility.

Businesses are taking a cautious approach as they navigate the shifting economic landscape post-Brexit, according to the trend of short-term leases. By opting for shorter lease durations, businesses aim to mitigate risks associated with long-term commitments and maintain the adaptability needed to respond to changing market conditions. This shift reflects a strategic response to the uncertainties introduced by Brexit, as companies prioritise agility and the ability to quickly adjust their real estate portfolios in response to shifting market dynamics.

Following the impact of Brexit, several UK-based companies are choosing relocating to EU countries, including Malta, to uphold their access to the single market. This strategic initiative has resulted in heightened demand for commercial properties, particularly within Malta's prominent business hubs such as Sliema and St Julian's. The relocation endeavours of these UK-based companies not only cater to their immediate operational requirements but also serve to enrich the vitality of Malta's commercial real estate market. This influx of businesses contributes to the diversification and expansion of commercial activities within key areas of Malta, bolstering the overall appeal and functionality of the country's commercial property sector.

Among the uncertainties brought about by Brexit, businesses have been making the strategic decision to transition from the UK to the vibrant market of Malta to maintain their EU presence. This move not only stems from the business’ desire to maintain their presence within the EU regulatory market, but also an embrace of the dynamic and EU-connected business environment in Malta. Whilst such a move may have initially triggered challenges such as navigating a new taxation system, adapting to local business practices, and establishing their brand, the perceived long-term benefits outweighed the initial challenges. With the support of the right advisors and a strategic positioning within the EU market, these businesses have seemingly experienced growth and continue to operate successfully.

Moreover, in response to the implications of Brexit, Maltese businesses that have established strong ties with the UK had to undergo a reassessment of their real estate strategies. The emergence of concerns surrounding potential trade barriers has prompted these businesses to contemplate adjustments to their real estate portfolios. Facing uncertainties post-Brexit, some Maltese companies with significant UK connections deliberated measures such as downsizing their real estate footprint or renegotiating lease agreements to adapt to the new trade dynamics. For this, the Maltese government had introduced a post-Brexit scheme to assist local businesses with the transition, covering up to 50% of the costs for advisory services. This support aims to help businesses navigate financial planning, sourcing goods, and logistics in a post-Brexit economy. This cautious and proactive approach is designed to minimise potential disruptions to their operations and financial stability, considering the changing trade landscape. By reevaluating their real estate strategies, these businesses aim to position themselves resiliently amidst the evolving post-Brexit environment, safeguarding their long-term sustainability and competitiveness.

Nevertheless, when looking back at the three years since Britain's exit from the European Union, the CEO of the Malta Chamber of SMEs, Abigail Mamo, has expressed that Brexit has been a challenging experience for Maltese businesses. Besides real estate, Mamo emphasised that Malta, having had a historically close relationship with the UK, particularly in terms of business, has felt a significant impact from the changes brought about by Brexit. According to Mamo, the aftermath of Brexit had been negatively impacted in sectors including imports of medicines, foodstuffs, second-hand cars, and education. This has led to changes in the ways of doing business and has created discomfort for UK brands operating in Malta. The increased bureaucracy and a less appealing consumer market, affecting both goods availability and regulation, have been highlighted as key challenges. The Maltese Government is trying to overcome these challenges.

Another downside is that the process of obtaining residency in Malta for British citizens has undergone significant changes following Brexit. With the UK no longer being part of the EU, British nationals are now required to navigate a new application process for residency, which now follows the procedures for non-EU nationals. This alteration in residency requirements post-Brexit is likely to have implications on the demand for residential properties in Malta. The revised residency application process for British citizens marks a shift in the regulatory landscape, aligning them with non-EU nationals in terms of eligibility criteria and procedures. These changes may influence the attractiveness of Malta as a residential option for British individuals, as the complexity or simplicity of the residency process can significantly impact their decision to relocate to Malta in the post-Brexit era. The Malta Nomad Residence Permit and the Malta Permanent Residence Programme have been the main go-to options for UK citizens seeking to live in and work from Malta and the EU post-Brexit.

Tax Reforms and Considerations

Cross-Border Investment Taxation

The post-Brexit era has brought about significant changes to the tax and regulatory landscape for UK entities operating in Malta and the EU at large. Here’s an elaboration on how these changes is affecting Malta:

One area affected is withholding taxes (WHT). The Double Taxation Treaties (DTTs) between the UK and EU member states, including Malta, have traditionally ensured 0% WHT on certain payments. Despite many of these treaties remaining effective post-Brexit, some require adjustments, such as advance treaty clearances, to benefit from treaty rates. This necessitates a more proactive approach from UK entities to ensure compliance and benefit from the treaties.

Moreover, the departure of the UK from the EU means that the EU Parent-Subsidiary Directive and the Interest and Royalties Directive no longer apply to the UK. This change removed certain tax benefits previously available, leading to higher tax liabilities for UK companies involved in cross-border payments with Malta and other EU jurisdictions. As a result, UK companies may need to reevaluate their cross-border payment structures to mitigate increased tax burdens.

Additionally, Brexit has altered the approach to cross-border mergers and acquisitions involving the UK. The loss of access to EU mechanisms like the EU arbitration convention impact the tax treatment of such investments. This change increases the complexity and cost of cross-border transactions, affecting UK companies’ investment strategies in Malta.

Lastly, UK licenced investment funds, asset managers, and investment firms that were passporting into Malta are now considered third-country entities. This reclassification subjects them to different regulations compared to EU-based entities, potentially affecting the tax and regulatory framework within which they operate in Malta. UK investment entities must adapt to these new regulatory environments, potentially impacting their operational strategies.

These changes highlight the need for UK businesses to stay informed and adapt to the evolving tax and regulatory environment post-Brexit. It’s essential for these entities to seek professional advice to navigate the complexities effectively and maintain their operations in Malta.

As the real estate market in Malta adjusts to the changes brought by Brexit, investors and stakeholders are navigating a changing landscape with opportunities and challenges. Despite the ripple effects of Brexit, the Maltese market has remained resilient.

For UK investors, adapting to the altered tax and regulatory environment requires diligent tax planning and strategic adjustments, but the Maltese Government's proactive support and incentives provided a cushion against potential disruptions. Commercial property investments in Malta continue to attract interest, with a shift in tenancy agreements reflecting a market influx seeking balance in the face of new economic currents.

Although Brexit has introduced complexities, it has also paved the way for new opportunities for investors in Malta's vibrant real estate sector. Keeping abreast of tax reforms and regulatory changes is essential for those aiming to capitalise on Malta's enduring appeal as a secure and profitable haven in a post-Brexit Europe.