Should the cypriot government leave the property market alone?

Photo: Sergey Yeliseev

It has not been an easy year for the housing market in Cyprus. Sales and prices have both fallen, as the island struggles to recover from recession. Construction is down too, as building permits fell 15 per cent in July 2013 compared to July 2012.

In the second quarter of 2013, Global Property Guide ranked the country as the worst housing market in the world, as house prices in the capital of Nicosia plunged 12.74 per cent, an even bigger decline than Greece.

Those falling prices are hoped to attract foreign investors to the island in search of bargain holiday homes. Indeed, Cyprus still boasts a strong lifestyle appeal that has won over many Brits and other overseas buyers in recent years.

Yet the island still has some way to go: during the first nine months of 2013, overall sales plummeted 45 per cent year-on-year, according to the Department of Lands and Surveys, while overseas sales slumped 28 per cent (from 1,030 to 737).

There is some glimmer of hope to be found in the island’s new “Golden Visa” scheme, which offers non-EU buyers residency in exchange for investment of at least €300,000 in Cypriot real estate. As a result, sales actually increased in the popular tourist hotspot of Paphos and Limassol in the first three quarters of 2013 compared to the same period in 2012.

But Chinese buyers are being deterred by the island’s “appalling practises”, Interior Minister Socrates Hasikos and general secretary of the Chamber of Commerce and Industry Marios Tsiakkis warned last month. Indeed, unprofessional behaviour from Cypriot sellers and estate agents in the past has harmed Cyprus’s reputation as a destination for investment, Hasikos said at an AGM, with non-issued title deeds affecting buyers from a range of countries.

Residents at one luxury development in Paphos have also recently complained that they are being targeted with higher taxes because they are wealthy foreigners.

Now, to add to the ongoing market tumult, the government has passed a new regulation to reduce rents. The law, which comes into effect from Friday 1st November, will slash residential rates for one year by 15 per cent for rents up to €300 and 20 per cent for rents above €300. Commercial rents will also be cut by 15 per cent for rates up to €600 and 20 per cent for rates between €600 and €2,000 (up to a maximum cap of €250).

The aim is to help tenants and shopkeepers who are struggling to make ends meet during financially difficult times, but the Cyprus Property Owners’ Association fear that it will only make matters worse.

Speaking to the Cyprus Mail, head of the association Giorgos Strovolides said that the market has “regulated the matter by itself”, as rents and prices have both fallen alongside each other. As a result, gross yields are around 3.8 per cent for apartments and 4.3 per cent for offices, remaining stable despite the market slump. Now, though, with the latest regulations, the market could be distorted, affecting the natural recovery of property prices. On top of that, lower rents will reduce those yields, making the island less attractive to foreign landlords looking for affordable investments.

As the country’s new residency law starts to take positive effect, should the government leave the Cypriot property market alone?