NEWS ARCHIVE

Creating and sustaining a rental property market

A continuous rise in property prices, the growing number of marriage separations, the substantial amount of new properties and large developments coming on the market, all highlight the need for a healthy rental market.

This is needed more than ever before, both to provide alternative accommodation for those who cannot currently afford to buy their first property, and from a vendor's point of view, to satisfy the purpose of those buying property for investment purposes or rental return.

To date, this market is governed by outdated and inadequate licensing policies and tax structures. Properties rented on a long-let basis for some reason still fall under the same tourism authority licensing guidelines for holiday premises, and an exorbitant licence fee, equal to one month's rent, is expected to be paid by the landlord.

This applies to rentals to foreigners and is subject to various conditions, including how long the tenant has been residing in Malta. Besides, a landlord is also expected to pay VAT and is subject to declare any rental income on his/her tax return, which in most cases attracts the 35 per cent income tax level that most people owning rental properties fall under. After deducting all these fees and taxes from the already low rental returns, which the market presently offers, a property owner is left with a miserable return on investment of between 1.5-2.5 per cent.

Recently, rumours of tax compliance have created many uncertainties in the market. Although the market evidently needs to be regulated, and the policies that govern it need to be updated, the way this is done is crucial to the future of the rental market in general.

We have been trying to bring various important issues to the attention of both the Ministry of Finance and the tourism authorities.

Firstly, it is time Government came up with a clear and final policy on the rent laws when renting to Maltese citizens. The fact that most landlords still fear renting to Maltese only makes it more difficult for those opting to rent a property instead of buying one. Roughly two out of three landlords still refuse to rent to Maltese although they have been reassured that today the old rent laws do not apply to new rentals.

Secondly, it is time to dissociate the standard tourism authority policies from long lets. When a long-term rental is concluded, it means that an agreement has been reached between the landlord and the tenants and both parties are probably happy with the outcome of this agreement. Therefore, no third party should have the right to dictate how equipped this property should be, whether it is air-conditioned or not, or how modern the furnishings are, as this is most probably reflected in the price and one pays for what one gets.

Therefore, although we agree and insist on the tourism authority regulating and controlling the licensing of holiday properties, we think that its involvement in the licensing of long-let properties is both a costly exercise and no longer appropriate.

We also propose a revised and more straightforward tax structure, which besides being easier and cheaper for the government to control would, more importantly, enable landlords to know exactly where they stand and what they are netting from their rental. This can be done by simply replacing any MTA fees with an annual nominal licence fee depending on the number of bedrooms or the size of the property.

Furthermore, a final withholding tax on any rental returns of say 10-12 per cent should replace the current income tax requirements, and therefore a landlord will know that for every Lm100 of rental income he receives, he has to immediately deduct Lm10-Lm12 in withholding tax.

Although the government's first reaction will probably be that this is a big decrease from the average 35 per cent tax due together with the annual tax returns, some basic calculations will show that a structure based on these proposals would probably bring in a much higher tax revenue on property rentals than the present partial revenues declared by a few individuals.

Let us not drag on with these issues until we will eventually destroy this potential market and its substantial input to our economy. Or worse, let us not, as has been the case in many other sectors, go from one extreme of laissez-faire to another of immediate taxation which would only scare everyone into selling their investments and creating panic in the market.

Courtesy of the Federation of Estate Agents