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Opinion & Analysis

Why the Gibraltar residential property market will survive this pandemic

By Mike Nicholls

In my view, Gibraltar’s residential property market is going to survive this malaise with this economic pause not as critical as the doom-mongers would have you believe.

Gibraltar is unique in so far as having some 28,000 jobs of which nearly 14,000 are fulfilled by residents of a neighbouring country. Half of those 14,000 Gibraltar employees traversing the border each day (until recently) are Spanish. The other half live in Spain out of choice or necessity (cheaper property).

Other than in 2008 when the Gibraltar economy took another short pause, demand for property in Gibraltar this century has generally outstripped supply and prices have increased year on year. The recent construction boom is a result of property developers responding to the most basic of economic indicators - demand is greater than supply.

When the referendum was announced in June 2016, local employers were concerned that the border would close, or become more difficult and urged the government to encourage more housebuilding to enable many more workers to move in from Spain. A property investment tax incentive was announced (still valid on new purchases in some developments) which encouraged investors to keep buying off-plan property which is the pre-condition of a lending bank to fund any development. It worked. Construction continued. And despite the completions of Imperial Ocean Plaza, Clemence Suites, Quay 29 and Ocean Spa Plaza recently (some 450 properties). The market absorbed these properties with original investors benefiting from capital appreciation or earning themselves a 5%-6% gross rental yield.

When the Gibraltar tax treaty with Spain was announced there was another surge in activity as many Gibraltar employees living in Spain feared that they might be caught in the four year deemed residency rule and wanted to switch to Gibraltar before it was too late.

In our own business, March was the best month we have had this current financial year (which for us starts in October) and our quarter one website statistics set new records.

Key economic indicators in the UK demonstrated that the UK too was on an upward curve in terms of property demand, partly fuelled by the Boris Bounce and partly by basic fundamentals of simply not enough property to meet demand.

But then lockdown hit us with very little warning like no other economic shock before and now we have business’ worst nightmare – uncertainty and the doom mongers coming back out to play. Gaming companies will go bust, retail is dead and the hospitality trade will halve leaving apartments across Gibraltar empty – so they say.

In my opinion this will not happen for the following reasons:

The employers

The greatest financial impact in absolute terms on local companies is on the shareholders. Shareholders receive income from dividends or a growth in asset value and bar the odd anomaly the sharp decline in business has put paid to those gains for a while. Such a loss will not impact the Gibraltar property market whilst the company has cash to pay its overheads. GVC’s (one of Gib’s largest employers) shares stood at £8.84 on 1 Jan 2020 falling to £4.84 on 3 April after a low of £3.24 on 19 March. William Hill (another large employer) started the year at £1.95, bottoming out in March at 36p and is now trading at 82p.

The point here is that unless the economic pause lasts for more than a few months, most companies can absorb the hit, continue paying their staff (enough for rent or mortgage and food at least) and it’s the shareholder value being eroded whether you are a shareholder of a plc or of a local private business. On a much smaller scale this is what is happening in Chestertons, income has dropped due to a lack of property sales and reserves will be used to pay overheads ready for the upturn.

The public sector, by far the largest employer in Gibraltar (c 5,500 or c 20% of all jobs) has guaranteed the continuation of full salary for the foreseeable future.

And the issue causing the current economic uncertainty is not unique to Gibraltar, which often results in fears that companies will relocate. The virus is worldwide. If anything, Gibraltar is proving how resilient it is under the careful stewardship of the government. This is not a relocation issue. Malta has the virus too.

The employees

Where the business has gone into such a sharp decline that the employer has had to furlough staff, and over 500 employers covering c 3,500 employees have applied for the government business support scheme so far, each employee is guaranteed a minimum of £1,155 in April at least at no cost to the employer. The majority of those employers will most likely be retail, bar and restaurant workers I would imagine, and again the majority of the furloughed employees will live in Spain. So again not impacting hugely on the local property market.

Rents or mortgages on residential property in Gibraltar will not be materially hit in the short term whereas Spain may feel an impact.

Working from home

Within a month employees have learned how to work from home and employers have learned that their businesses continue whilst their staff are dispersed around the area. Many quite like this new way of working. Zoom and Teams are becoming standard like Whatsapp and Outlook already are. Employers may realise that they don’t need the additional office space, employees may request more flexible working patterns – hours and location. Residential property now needs a new room in it – the home office.

Yet whilst this would appear to encourage Spanish living, we need to revert to the terms of the new Spanish Gibraltar tax agreement which ensures that where management and or control of a Gib company is undertaken physically in Spain, the GibCo risks being taxed as a Spanish company. Indeed, late last year a local gaming company prevented home working if the home was in Spain in fear of the fiscal impact it might have on the company. Hence for an employer and employee to benefit from home working in the long term, that home will need to be in Gibraltar, certainly for management and directors, possibly for others. So currently that’s 7,000 non-Spanish nationals who are employees of Gibraltar companies and live in Spain who might just think about a Gibraltar home. Yet there’s less than a thousand open market properties currently under construction in Gibraltar. So if just one in seven fancy relocating, we run out of property, again.

Fast forwarding into the future, the companies doing well currently, are the online businesses whether retail, gaming, home office related or educational amongst others. That’s a lot of businesses who could find Gibraltar’s fiscal regime attractive whilst themselves being easy to relocate as forecast profits set to increase.

Tenant demand

Let’s assume this pause lasts for 3 months, it follows that some buyers may stall their property purchase if their finances have been hit ensuring they rent for longer. Again unique to Gibraltar is the choice of off-plan property and an investor often doesn’t mind whether he rents or sells the property at completion. There is flexibility within our open property market to allow for swings between owner occupation and renting.

Interest rates

At 0.1% pa base rate there is plenty of incentive to borrow at historically low rates in order to achieve 5%-6% gross income and capital gains (without capital gains tax unlike most other countries) which over a 10 year period will likely outperform inflation. Landlords will be comforted by the fact that according to the Daily Telegraph today, although no two crises are the same, it’s interesting to note that in the UK whilst property values fell sharply in 2008, rental levels were generally maintained, yields began looking rather more attractive, and then came the swift bounce back on capital values.

In the UK last week, the property auction specialists Allsops had to host their monthly auction of residential property online as opposed to their normal auction room. They sold 139 lots out of 197 raising £28m in the process, a fairly standard success rate. One property in Kent with development potential and with a guide price of £250,000 sold for £360,000. “It was a great relief to see that there is still a competitive market for residential property. As ever in times of crisis, buyers focused on quality of location and security of income,” said Gary Murphy, partner and auctioneer at Allsop. “Because we’ve demonstrated prices are holding up, I don’t think there’s any reason people should be holding back completely. We’re entering the new normal over the next few months.”

So whilst I would be worried if I was a landlord of residential property in Spain I would be encouraged by the unique factors that make up Gibraltar’s open market residential property sector.

The banks also remain in good shape albeit may be more cautious post pandemic until values re-establish themselves.

The new working from home phenomenon, the new tax treaty and new government measures to help companies with their inactive employees, together with a pool of up to 7,000 potential new residents of Gibraltar, should be sufficient to absorb any shocks and has laid the ground ready for a swift and positive return to normality in the Gibraltar property market once we are allowed out again.

Stay safe.
NOTE: Mike Nicholls is the managing director Chestertons (Gibraltar). This article was first published on the Chestertons blog and has been reproduced with kind permission.