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100.000 sqm of office space being built

18th May, 2014
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Joseph G Pace, our commercial properties division manager provides his insight on the commercial market.

Over 100,000 square metres of office space is at various stages of construction and finishing, half of it at the Farsons business park, according to the manager of the commercial properties division at Frank Salt Real Estate Ltd.

A third of the space is in core areas with the remaining 15 per cent in peripheral areas.

“In addition to this, the original plans for Smart City Malta incorporated two or three more office blocks and with high occupancy in the existing towers, we should assume that these additional blocks will go ahead,” said Joe Pace.

“And, of course, we now have a high-rise policy with some applications already in the pipeline which could provide quality office space.”

“The range of clients is extensive”

He noted that some of the larger projects were being built in phases – sometimes with considerable time lapses in between each one – which were not the ideal scenario. “The ideal situation would be to have all the phases constructed at the same time but, obviously, if the financing does not allow this, then as far as possible there should be no gaps between one phase and another because the tenants want to get the full benefit of these ambitious project as soon as possible.

The additional office space will undoubtedly put pressure on prices, which are buoyant at the moment, especially on properties which are not in prime areas.

“Foreigners love the Sliema and St Julian’s area, and although the Maltese might be put off by the lack of parking, many foreign youngsters working here do not rely on cars and prefer to work in an area with good lifestyle options like shops and restaurants on their doorstep,” he said.

“So while these areas will keep attracting good rental rates, properties further out might need to review their rates to ensure they remain realistic.

“Having said that, we monitor the market carefully and people are not being greedy. They are merely charging what the market can sustain – and yes, some sites can afford to charge premium prices because clients are getting a premium location.”

These developments are not coming a moment too soon. Demand for office space has been growing steadily over the past few years, particularly for properties offering location, good finishing and connectivity.

Purpose-built offices are obviously the most popular but since these are few and far between, many clients accept upgraded or refurbished residential properties.

“The range of clients is extensive. We have everything from two-man start-ups who are moving into their own office after using a room in their lawyer’s premises, to gaming companies requiring thousands of square metres,” Mr Pace explained. “Our advice is always for the developers to go for open spaces which offer tenants flexibility.”

Developers are now scrambling to find suitable locations and Mr Pace believes that they may need to consider demolishing existing buildings and rebuilding them as offices, given the shortage of suitable greenfield sites.

But land is not the only constraint: finance is also restricted as banks have become very selective about projects. However, these constraints are not necessarily a bad thing… Mr Pace is concerned that if too many people jump on the bandwagon, the situation could be reversed in the next three to four years and Malta could end up with more supply than demand, which would drive down prices.

“However, I do not think that this is likely. This happened in the residential market but investors already got their fingers burned and learned their lesson. And the banks are much more selective about projects to finance. The only risk we see at this stage is demand dropping due to unforeseen external factors,” he said.

When it comes to real estate, the lack of formal data is a real problem as it makes it far more difficult to spot trends and even sub-trends – let alone to predict future opportunities. “Our clients come to us for advice but we can only give them guidance based on our perception and best informed guesses!” Mr Pace said, adding that overseas, data was collected by specialised, independent research firms.

This lack of data makes it difficult to analyse the market – but the information from a major player like Frank Salt Real Estate gives a good indication of the situation at present. For example, eight out of 10 entities prefer to lease than to buy – but the two that to buy tend to be big clients.

“There is no emotion involved in developing commercial space. Investors are looking at their return, and while you can expect a rental return of 5-6 per cent on residential properties, the expectation for commercial rentals is 7 per cent or over,” he said.

“This is especially important when you consider that the value of the property is not appreciating by double digits as it was a few years ago. So with around 1 per cent annual capital appreciation, it would not be a good investment unless you got a good rental income.”

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