A Paradise in Trouble?

六月 18 2020

We were nearing full recovery in the real estate market with positive trends, only to face now the virus situation. This, in addition to human losses, is causing now side effects on business, especially to the tourist industry and by projection to real estate.

As if this was not enough, we have added problems in the near horizon such as:

• Passports – A recipe which done well for a few years, is now in trouble with the E.U., placing pressure to abolishing this Cyprus Investment Scheme. If this happens the repercussions will be considerable, especially with regard to the high rise blocks, which are directed towards this market source, with a consequential effect on some of them not been completed with a clear effect on the bank’s finance (NPLs), unemployment and the lucrative income that this has produced for accountants/advocates/agents and others.
• Income Tax – A joint effort by France and Germany and in general the E.U. to adopt a uniform taxation system is another cause for concern for Cyprus, especially now that the two protagonists are connecting any financial assistance to countries that have an attractive tax system (such as Cyprus) to increase their tax. The Cyprus taxation system is one of the many reasons of Cyprus economy revival and whereas the Government of Cyprus is trying to introduce more and more incentives, it seems that this will not only be halted, but to turn around (you might remember how France and Germany changed the E.U. economy indicators in the past, to cover themselves for their indicators which were not in accord to the E.U. indicators).
• Russian Pressure – As if these are not enough, we have now pressure coming from the Russian Government regarding our double taxation treaty, starting from Cyprus, but leaving out (at this point of time at least) countries such as Denmark, Luxemburg etc.
• Small Politics – This is another inherent problem with the various political parties opposing the Government’s measures to assist business by differing these handouts, but not reducing them with as a result the delay in the economy restart.
• M. Thatcher – We wish we had a strong politician such as Mrs. Thatcher, who managed to place under control the never-ending demands of unions in the U.K. We see the various Cyprus unions causing trouble in our economy asking for more and more (and less and less working hours). The recent High Court decisions on the Civil Servants demand for €800 mil. refund got us (all the rest of us) off the hook, but so much is their greed that they have applied to the European Court of Justice. You do remember a few years ago when the then Minister of Education “dared” to introduce some alterations to our system of education, with the unions promptly demonstrated with 10.000 people in the streets – at the end of the Government pulled back and we came back to secure one. During the writing of this article, we just happened to see the story of Jimmy Hoffa, the Chairman of the Truckers Association U.S.A. A beautiful example from the USA where the Government almost came to its knees by a union
• Financiers/Banks – Despite their effects and although improving, they still face problems and with the recent Bail In of the year 2013 and the near one of the Co-Op not only the financiers are not earning anything, but in addition the shareholders are called from time to time to contribute more from their initial investment. As such a loan application is now being a calvary with time required for a loan issue (from the date of application) surpassing 2-3 months.

So, justifiably, dear readers, we are worried about the whole situation, especially coming to know by examples, that small countries, such as Cyprus, is the prey of the larger countries (in the E.U.), especially at times of financial strife.

All these (and other) matters have their repercussions on the real estate market. It is early days to specify what the effect is in terms of reduction in demand/property values, but as an indicative estimate and as present circumstances stand, a reduction of ±10% is reasonable. Depending on the duration of the virus and the other factors mentioned above, it will get worse. The recent reports (by the Lands Office) record that sales have dropped by 70%, so you do appreciate what the results will be during the year 2021 (expected commencement of recovery not earlier than 2022). The part of the market that is expected to be least affected is the residential market directed for locals and for the average prices, within towns/periphery. Housing is a social need, either for ownership or for rental, whereas the archaic dowry system is an assistance to young couples. So, we expect that this sector of the market will be the least affected, whereas if this situation continues, there will be an increasing sale of hotels and other tourist related properties, followed by shops/commercial uses (see also side effects by the Malls competition) and to industrial units (save the small ones for use as storage). Agricultural land will remain at the rock bottom still struggling not so much to sustain their value levels, but to create some sort of demand/realization of sale. Properties which are rented for income are expected to retain their present level, since with the low deposit rates on the savings and with the retirement/pensions that are collected by mainly the Civil Servants, money will be around, be it to a smaller extent, whereas the increasing unemployment will create a difficulty as a result of which will increase demand for rental accommodation. Rental (gross) returns are on average 3%-4% for residential units and 5% for commercial, whereas industrial returns do not show a steady/average return – but on average 5% (if a suitable tenant is found).

Regarding rentals, what is important to note is not the level of rental income that a tenant pays, but the ability to abide in addition to the rent his other obligations, such as common expenses/repairs etc.

So, now is the time/even better during next year, for those daring and adventurers and with money available to start searching for “opportunities” which appear on the various banks’ websites, administrators, investment funds etc., who have now more difficulty to dispose their assets than before and now, we expect, to be more inclined to accept offers than before.

We must point out that the Government of Cyprus, is introducing all sorts of investment incentives regarding the real estate market, such as the abolition of the property tax, the reduction of transfer fees and now added tax deductions in the event of landlords concluding a deal on the passing rent reduction for a couple of months of at least 30%.

Everyone loves his own country and it is not an exaggeration that we report that Cyprus is a Paradise despite its problems. The weather, widely spoken English, short distances, low crime rate, reasonable cost of living, education opportunities at all levels and the variety of the countryside are just a few of its attraction. On a recent visit to London, we took a taxi for our appointment. After 45’ minutes we stuck in a traffic jam, so we got out and we walked for ½ hour during the rain to reach our appointment on time. If in Paris you should not walk on your own, especially after hours since the crime is evident, whereas in Milan, our experience on pickpockets was shocking.
In ending and during a visit of ours in a Bedouin camp in Jordan a few years ago, literally in the middle of nowhere, our host asked us “my friends is this not a paradise”?

Yes, Cyprus is a paradise, but troubles are ahead.