We are afraid that more dark clouds are gathering over the housing sky of Cyprus. Last week’s new restrictive measures by the Central Bank is an indication of new restrictions on housing finance that it is coming.

With respect to non-permanent residents (mainly foreign people) who do not buy a house as their main residence, the situation is even more difficult than the locals. Even if a foreign buys a property in Cyprus, which he intends to become the house for his permanent residence, he must first prove that he will live in the house for at least 183 days a year. So, for someone who is not living already here as a permanent resident, it is an impossible criterion to meet. Inevitably the new measures will affect first time buys and resales, due to the increasing difficulty to obtain finance. We do not necessarily blame the Central Bank directive, since loans on property purchases have increased by almost 30% during the first 3 month period of this year, whereas the Central Bank had in mind no more than 10%-15%. So, in addition to the last year’s requirements of non permanent property buyers to contribute 40% of the sales price (or the valuation price, whatever is the higher), we have now added restrictive measures which include the following:

• The V.A.T. will be the responsibility of the buyer to cover 100%. As such, if one acquires an apartment for £100.000 + 15% V.A.T. = £115.000, the Bank will contribute the 60% loan facility on the £100.000 only.

• Transfer fees which were originally included in the total property’s value/cost are now also excluded. So in the above example of total cost of say £115.000, the added transfer fees of approximately £8.000 will have to come out of the buyer’s pocket totally as well.

• If finance is required for a property, the value of such property must be such, so as to cover the 60% (no added property will be accepted).

So effectively the originally envisaged 40% contribution will be increased to 62%, a very high percentage to meet. For those who fall under the category of first time, permanent residence where the original requirement was 20% own contribution, this will increase to 42%.

What we expect will happen is that the financially weak will be out of the market and in addition, investors who buy-to-let, will find it that there are greener pastures elsewhere, whereas at the same time those who cannot afford to pay, will turn towards lettings. Bearing in mind however the reduction in demand from the buy-to-let market and the increased demand for lettings (two negative considerations) rents are expected to increase over the next 2-3 years, time needed for any excess (to let) supply to be absorbed by the market. These new measures might place the new socialist Government in an embarrassing situation, since the lower income groups will not be able to buy, placing pressure on the Government either to build more housing estates (what a mistake) and/or proceed with an increased offer of Governmental building plots for the lower income groups, refugees and others (a measure well exploited by this category of lower income groups, since the cost of houses that are built, are not giving the impression of weak financially people).

We might experience the situation where people needing finance, will turn to foreign banks, in order to secure what they need, since foreign banks are not governed by the Cyprus Central Bank regulations. In this respect, those who can benefit are the property with a title, which can be mortgaged, unless, in case of developers, they secure themselves cover finance from abroad. Regarding those who buy to let in the touristic areas, there are some good news which appear on the horizon of hope in this gloomy situation. Low cost airlines are interested in Cyprus and with the expected announcement of “our own man” (Stelios) with Easy Jet operating this year, the cost of travelling will become lower and thus easier/lower cost of letting. At the end this is a difficult situation since Cyprus forms part of a global economy and the goings on in any country (see U.S.A.) affects the others.

As we have repeatedly said in this column, do not depend on the rental of your property to repay the loan. The advertised 7%-10% p.a. rental income returns, is just a con job by developers and others (including estate agents) in order to encourage a sale. The truth is no more than 4% on the value of the property at current prices and this refers to such property, that holds some form of a competitive feature against other market alternatives. So for those who “must” rent their property choose a good location with common facilities (pool, tennis courts, garden, sea views, on spot management etc). Having said all these, it appears that a villa of 3-4 bedrooms is the best choice so far, especially if they are situated in Paphos or Limassol where there are all the year round visitors. For the other seasonal areas, such as the Famagusta region, the situation is more difficult due to their seasonality.

The Central Bank is set to restrict even more property sales/finance and we will not be surprised if there are more restrictive measures coming, not to add the local income tax office plans to monitor those people who let. A difficult job to do since lettings are concluded abroad, but, then, a few spot inspections by the local tax authorities will upset the market by placing an added restrictive measure on sales to this sector of the market (we are informed that the tax Authorities may undertake monitoring measures on those local Cos and abroad, who undertake lettings in Cyprus, who will be required to report their lettings, including individual lettings through the internet!!).

So care is needed and do not overstretch yourselves financially for this type of investment. Life is short and the hassle you stand to be involved with if these measures actually take place, is not worth it.

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