By Stefanos Evripidou
WITH EU enlargement just round the corner, Cyprus will no longer be just another tourist destination offering sea, sand and sun. It will become a place to work, raise a family, do business and retire… for a potential half a billion people.
Construction companies are working round the clock, roads and marinas are being built, EU companies are looking for new markets and migrating EU citizens are getting younger and younger. Also, the government will soon introduce VAT on property purchases in accordance with the acquis communautaire.
All this leads to one conclusion: real estate is going up and up and up.
At the moment, according to Cyprus law, a foreigner is allowed to buy as much property as he wants, but he is only allowed to transfer one house or one plot of land up to 4,000 square metres (three donums) in his own name. Additionally, he must get Cabinet approval to transfer the deed. If he has lived and worked on the island for many years, he may get permission to own a second home.
However, after EU accession, every EU citizen will have the right to move freely, work and settle anywhere within the bloc. Cyprus has negotiated a five-year transitional period for the lifting of restrictions on secondary residences. In effect, this means that, regarding property ownership, EU citizens will only have equal rights to Cypriots after 2009.
One property analyst believes that property prices could rise by 30 to 50 per cent by then. “There will be a huge rush to buy before VAT comes on. But the freedom of movement and labour that comes with EU accession will increase demand for real estate considerably,” says Antonis Loizou. “At the moment, only foreign retirees buy property for their own use. Once restrictions are lifted we will have a younger generation of purchasers wanting to work here, investors buying up houses and leasing them, companies investing provident funds, and eight new member states with no sea and sun. That’s millions of people,” added Loizou.
He noted that EU accession would open Cyprus to a market with a high standard of living, making leisure time cheaper for its citizens. “Air fares will eventually go down with cheap, no frill flights, like EasyJet, coming to Cyprus. This removes a major obstacle to Cyprus. It also means another boost to the real estate market. Prices will not be falling,” he said.
The Sales Manager for BuySell Real Estate in Paphos agrees with Loizou’s assessment. “Prices will continue to go up. There’s a lot of construction activity and infrastructure development at the moment. Not only is Cyprus becoming a top destination for retirement, but also, younger people are coming here because they see it as an investment,” said Chris Hadjikyriakou.
“We are seeing a lot of movement from a younger clientele who are fed up with the situation in the UK. They are taking into consideration taxes, immigration, weather and children’s safety. The EU has opened up a new market of younger educated people who can work, have businesses and live here, thereby increasing the number of houses here,” he added.
“They prefer Cyprus to Spain because they find it friendlier. Many want to stay here and work from next year. We have seen a big interest on new properties. In Peyia village alone, around 2,000 building permits have been issued. There is a tremendous amount of building going on.”
Cyprus’ tax laws further enhance its attractiveness as a location to settle. Currently, pension income is only taxed at five per cent, compared to 25 per cent in the UK, noted Hadjikyriakou.
Loizou highlighted the minimal level of capital gains tax on the island and the absence of inheritance tax. “There is no inheritance tax in Cyprus. If you are a permanent resident of Cyprus and you die, it means the inheritance of your estate all over the world is tax-free. This is important for very wealthy people. Nobody knows when you are going to die, but if you are 70-plus, it’s a good time to think about it.”
So increased demand is almost guaranteed. But what else will push up prices?
“VAT is going to cause us a lot of problems. But we don’t have a choice; we have to impose VAT on property purchases. The government might abolish transfer fees to offset VAT, but they only account for 5-8 per cent. Compare that to 15 per cent. Buying will definitely be more expensive,” said Loizou.
Cyprus has been granted a transitional period until the end of 2007 before imposing VAT on land. Houses, however, will have to pay full VAT from accession on May 1 next year.
What does this mean for locals?
“This is bad news for locals. If you own property, it might be worth more, but once you sell it, other properties will be just as expensive,” warned Loizou. “Prices will increase gradually, at least by 20-30 per cent by 2009. But if you add five per cent related inflation to the increase in demand from EU countries as we come nearer to 2009, because there is less risk in buying two years before the restrictions are lifted, then prices are more likely to rise by 50 per cent,” he said, adding, “after 2009, God help us.”
Hadjikyriakou believes the government should intervene when Cypriots can no longer compete in the property market. “Many Cypriots cannot afford it. Those that don’t already have property will find it very difficult. Newlyweds are also having a hard time and are obliged to rent where possible. The government is not helping.”
A government source told the Sunday Mail there was no plan to eliminate transfer fees as a balance against VAT. “This issue was not raised during the tax reforms and currently there are no plans to do that. But that doesn’t mean it wont be addressed in the future.” The source highlighted that the reduction in interest rates was a factor which helped alleviate the rising prices. “One can see interest rates further decreasing or staying at current low levels. This should help people who wish to buy residences.”
But all these factors will be seen through different glasses if there is a solution to the Cyprus problem.
“It depends on what type of solution we end up with. Other things being equal, and if they give back Varosha, then there will be a shift in the population which could lead to stagnation in property prices in residential areas,” said Loizou.
The Annan plan is still on the table, and it is not clear whether a solution would impose a cap on the number of Greek Cypriots allowed to move to the north and Turkish Cypriots to the south. It is also uncertain whether EU citizens will fall within the same basket.
“If the Europeans can buy in the north freely, then they are more likely to do so. But an overall solution will encourage investment both in the north and south,” said Loizou, adding, “Overall, it could lead to two or three years of price stagnation in the real estate market in the south. It all depends on the solution. It will take years to sort out the land and property issue. However, there will be a gradual, not major effect.”
The future remains to be seen. A rush to buy immovable property now could cause house prices to spiral further out of control. And what of VAT? Could that be considered inflationary double taxation? The answers are out there. But in the meantime, I’m off to buy a tent.
The Cyprus Mail is the only English-language daily newspaper published in Cyprus. It was established in 1945 and today, with its popular and widely-read website, the Cyprus Mail is among the most trusted news sites in Cyprus. The newspaper is not affiliated with any political parties and has always striven to maintain its independence. Over the past 70-plus years, the Cyprus Mail, with a small dedicated team, has covered momentous events in Cyprus’ modern history, chronicling the last gasps of British colonial rule, Cyprus’ truncated independence, the coup and Turkish invasion, and the decades of negotiations to stitch the divided island back together, plus a myriad of scandals, murders, and human interests stories that capture the island and its -people. Observers describe it as politically conservative.
