Property tax bill about-turn

Poly Pantelides
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13

THE GOVERNMENT has backed down from its intention to update immovable property prices by applying a formula that stakeholders had said would hike up taxes many times over and would drive the Cyprus economy deeper into recession.

The House plenum is due to discuss an amended bill on January 17 that will remove a provision to update property prices, which was part of the preliminary agreement between Cyprus and its international lenders.

Interior Minister Eleni Mavrou said that the bill would not now update property values using the Consumer Price Index (CPI) over 1980 to 2012.

“We’re going back to the 1980 values,” Mavrou said referring to the way immovable property tax is currently calculated, which is on the property’s value on January 1, 1980.

Lawmakers recently discussed, but postponed voting on, a previous bill that was going to update the values to 2012.

Hotels said that would increase by nine times the amount of tax a hotel would have to pay, and stakeholders and lawmakers asked the government to amend the bill.

“It now seems that the amount that we must aim for is significantly lower than the €180 million we were discussing,” Mavrou said.

She said that the terms of the amended bill are under discussion with Cyprus’ lenders and the finance ministry to clarify how much the government should aim to receive in taxes, though she added the figure might be somewhere over €60 million.

It was not immediately clear if the tax rate for the value bands – also subject to changes under the bills previous guise – was part of discussions.

But Mavrou said that “the average household” would not be impacted as they fall under the tax threshold.

The CPI provision had drawn a large reaction from landowners, property developers and hoteliers who said the changes would drive the economy deeper into recession.

Under the changes as they were tabled for discussion under the bailout agreement, the taxable figure –levied on the total value of all properties in a person’s or company’s name – would be the result of multiplying the 1980 value of the property by about 3.5.

A property worth €170,000 in 1980 values would have risen to €595,000 after multiplying it with the CPI. The chairman of property developers Pantelis Leptos said it was an unfair bill that would act as a deterrent for investment.

The hotels association PASYXE chairman, Haris Loizides, said that the bill as it stood increased the tax a hotel had to pay by nine times, which would have translated to a hotel that paid €27,600 in IPT last year needing to pay €253,380 in 2013.

Cyprus property tax bill about-turn

Our top 10 stories from Cyprus in 2012

Nigel Howarth
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6

CYPRUS Property News attracted more than 720,000 readers this year and as we approach Christmas here are the top ten stories that have attracted the most interest from you, our readers, over the past twelve months.

Our top 10 most read stories are dominated by reports of people seeking legal advice on their situation and some cases taking the banks and developers to court in their quest for justice.

1. UK jurisdiction granted in High Court ruling

A group of British buyers who purchased off-plan properties in Cyprus had won the right to have their cases against their Paphos-based developer heard in the UK. (The High Court judgement was eventually handed down in November).

2. Dreams of a home in Cyprus turn into a nightmare

News that property buyers were seeking redress following the doubling of their mortgage repayments alleging that Cypriot lawyers acting on their behalf may not have complied with crucial legal formalities.

3. Do not ignore Cypriot bank writs for loan non-payment

A stark warning urging those who receive a writ from a bank for the non-payment of a housing loan/mortgage or a termination notice not to bury their heads in the sand in the hope that the problem will go away.

4. Banks should offload distressed properties

A call for the island’s three largest banks to offload billions of Euros of property left on their books by bankrupt developers, who would have gone under if it had not been for the vain attempt by the banks to keep them afloat.

5. Legal battle looms over Cyprus homes

News that victims of the hard sell to buy in Cyprus with a mortgage denominated in Swiss francs at the peak of the island’s housing boom were preparing to fight one of Greece’s largest banks in the courts.

6. Natural gas find offshore Cyprus worth tens of billions

Nobel Energy announced that it had discovered significant natural gas reserves worth tens of billions of Euros; enough to satisfy Cyprus’ electricity production needs for more than two centuries.

7. Russians warned against buying property

Report that a pamphlet in Russian entitled “?????????, ????!” (Beware of Cyprus!) was being handed out at the Sheremetyevo International Airport in Moscow warning Russians not to buy property on the island as a consequence of the experience of a young couple honeymooning on the island.

8. British consumers seek UK justice

News that British buyers were taking action in the High Court in London in an effort for their cases against Cyprus-based organisations to be heard and decided in a UK court. (See our number 1 story).

9. Bank opens dialogue in Cyprus property mis-selling

Hope for thousands of buyers who had fallen behind with their mortgage repayments as the Alpha Bank offered to open a dialogue with them in what it referred to as a “gesture of goodwill”.

10. Protest at ‘A Place in the Sun Live’ property exhibition

In April a group of property buyers continued to raise awareness of the problems associated with buying property in Cyprus by holding a peaceful protest outside the ‘A Place in the Sun Live’ exhibition at Earls Court.

May we take this opportunity to wish all of you a very Happy Christmas and health and success in the New Year.

??? ??????? ???? ???????????? ??? ??????????? ?? ???? ???? 2013.

Why aren’t prices falling as much as they should?

Pavlos Loizou MRICS VRS
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1

WHEN prices are going up there are numerous transactions, market signals that show to vendors/buyers where prices are. Thus, once a transaction concludes all other vendors raise their asking prices almost immediately to match, if not exceed, that achieved price.

In contrast, when the market is going down there is little, if any, market evidence as to where prices are. Thus, vendors tend to leave asking prices where they are as they don’t know what the market value/price of the asset is. Also, if a transaction does conclude at a significantly lower level than the asking price, this is often dismissed as being “uncharacteristic of the market” or that the property is dissimilar to theirs.

Of course there are other factors at play. With the financial problems of owners, developers and borrowers spreading like wildfire there is little interest by financial institutions to “push” anyone in disposing of their asset. If banks were to do so, their thinking goes, either the owners of large properties would simply default as there is simply no demand for their assets, or the achieved price would have a dual impact on the financial institution:

Firstly, the income from the sale of the asset would be lower than the loan amount which means that the bank would need to write-off the difference.

Secondly, it would give a clear market signal as to where property prices are which would result in a downward revaluation of the market value of other properties which would in turn result in a lowering of collateral values.

The effect of the above is a frustrating case of “chicken”. Either the bank pushes the owner of the asset to sell it thus resulting in possible losses, or the bank doesn’t push them and continues to hope that the market will turn to its favour.

The chicken in this case has been met by a butcher’s knife called PIMCO and thus this dilemma has ended. Banks will soon be forced to take their losses upfront.

Are lower property prices good for the economy? The short answer is “it depends”. Lower property prices mean that property should be more affordable and that rents should be lower making business more profitable as real estate is typically a company’s second highest expense.

However, if salaries fall more than property values, then relatively they are more expensive and thus still unaffordable. Also, lower property prices without the availability of credit to finance an acquisition isn’t really of any help unless you have significant savings.

If one were to consider that most companies in Cyprus raise debt by mortgaging their property assets and that most property assets are already collateralised by banks, then the impact of lower property prices, although good in theory, would have, and is having, a significant negative impact in practice as the collateral is “shrinking” and the loan to value ratio is rising often above 100%.

Property prices will continue their apparent slow fall to the bottom. However, it’s a buyer’s market. You the buyer calls the shots and there is no-one out there who is not in need of hard cash.

Make a lowball offer and you will be surprised by the reply.

About the author

Pavlos Loizou MRICS is the lead consultant at Leaf Research

Leaf Research is a real estate consulting firm, providing high quality real estate market research, strategic consultancy, valuation, and financial modelling.

EU still progressing Cyprus property issues

Nigel Howarth
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5

IN NOVEMBER Daniel Hannan, MEP for South East England, raised a question in the European Parliament relating to a complaint raised by Denis O’Hare of the Cyprus Property Action Group (CPAG) in 2011.

A week later, David Martin, MEP for Scotland, raised a further question in the European Parliament concerning the Commission’s report on property development in Cyprus.

Commission Vice-president Viviane Reding has provided an update on progress:

Question for written answer E-009932/2012
to the Commission
Rule 117
Daniel Hannan (ECR)

Subject: Justice for property buyers in Cyprus

Tens of thousands of property buyers in Cyprus have developer mortgages on their homes thanks to the corrupt actions of property developers, banks and lawyers. The Government of Cyprus is complicit in these crimes owing to its failure to publicise and enforce the Unfair Commercial Practices Directive (UCPD), as per official complaint CHAP(2011)3252.

Unless the Commission punishes the Cypriot Government for this and offers redress to the victims, is it not also complicit in these crimes?

E-009932/2012
Answer given by Ms Reding
on behalf of the Commission
(14.12.2012)

The Commission has been, and continues to be, active in addressing the problems faced by many immovable property buyers in Cyprus because of the practices of developers, banks and lawyers.

In this respect, the Commission would refer the Honourable Member to its answer to written questions E-008121/2012 and E-006765/2012.

Question for written answer E-010363/2012
to the Commission
Rule 117
David Martin (S&D)

Subject: Commission report on property development in Cyprus

The Commission will be aware that in January 2012 it received a reply to a letter it had sent to Cyprus. The Commission’s initial letter was an enquiry into the actions carried out at a national level to address the practices of property developers and the measures taken to ensure that consumers are adequately informed about the Cypriot law on unfair commercial practices.

In April 2012 the Commission finalised its report on the Cypriot response.

Could the Commission outline the conclusions of this report and provide an update on the situation regarding consumer protection in dealings with property developers (this question is with regard to Alpha Panareti Limited specifically)?

E-010363/2012
Answer given by Ms Reding
on behalf of the Commission
(18.12.2012)

The Commission cannot communicate on the content of the Cypriot letter mentioned by the Honourable Member. Indeed, this document has been received in the context of an on-going pre-infringement procedure and its disclosure, even partial, might jeopardize the process of investigation and inspection of the dispute and its resolution.

Answers to written questions E-8121/2012, E-6765/2012 and E-9932/2012 provide an update on the various actions initiated by the Commission in order to address the problems faced by many immovable property buyers in Cyprus and ensure that consumers are adequately protected.

More junk piled on Cyprus by Standard & Poor’s

Alan Lawton
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10

STANDARD and Poor’s has pushed Cyprus further into junk territory by slashing its credit rating by two notches to CCC+, reflecting its view that the Cyprus government’s short-term financing position is increasingly vulnerable.

In its statement, S&P said “With the government’s financing options increasingly limited – coupled with what we view as the hesitant attitude of Cyprus’ eurozone partners toward sharing the cost of a severe banking crisis – we view the risk of a sovereign debt default as considerable and rising”.

“The downgrade reflects our view that Cyprus’ creditworthiness has deteriorated further since the last downgrade on Oct. 17, 2012, as financing pressures have intensified and uncertainty about the terms of any official support persists ahead of the February 2013 presidential elections.”

S&P noted that while Cyprus’ bailout talks with the troika (International Monetary Fund, the European Union and the European Central Bank) has been slow, some progress had been made.

It welcomed “far-reaching spending cuts” included in the government’s 2013 budget proposal, but cautioned “We believe the budget’s underlying revenue assumptions may be too optimistic.”

S&P said that the negative outlook indicated that another downgrade was possible, should “external and fiscal financing pressures escalate.”

“We see at least a one-in-three chance that we could lower the ratings again in 2013,” the agency said, adding that the rating could stabilize if a bailout deal was “quickly agreed”.

Cyprus property price slump continues

Nigel Howarth
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1

ACROSS Cyprus, property prices continued to fall in most areas of the island during the third quarter of 2012, according to the twelfth edition of the Property Price Index published by RICS Cyprus in conjunction with the Association of Quantity Surveyors and Construction Economists (??????).

Over the quarter, the prices of residential apartments and houses fell by an average of 0.4% and 1.1% respectively.

The price of apartments in Paphos increased by 3.8% compared with the previous quarter, while those in the Paralimni/Famagusta area remained steady. However, prices in Limassol fell by 1.5%, while those in Nicosia and Larnaca fell 1.3% and 2.1% respectively.

House prices in Paphos and Paralimni/Famagusta area remained steady. But prices in Nicosia fell by 0.3%, while those in Limassol were down 1.1% and those in Larnaca were down 4.6%.

Commercial property prices also declined. The prices of retail properties fell by an average of 7.1%, while those of offices and warehouses fell by 3.3% and 2.8% respectively.

RICS Cyprus commentary

During the third quarter of 2012 the Cyprus economy bore the consequences of the slowdown in the economy, the lowering of the sovereign’s and the banks’ rating, and the continuing political turmoil in Greece. The worsening state of the Cyprus economy and the growing political and economic uncertainty across the eurozone, led to a pronounced slowdown in mortgage and corporate lending and a further rise in the rate of unemployment.

There has been a minimal number of investment transactions during the first half of 2012, with the third quarter lacking any notable transactions except the sale of some prime homes in the Limassol area.

Property, both commercial and residential, is increasingly viewed as a risky asset and one with negative prospects in the near to medium term. Local buyers in particular were the most discerning as the increase in unemployment and the worsening prospects of the local economy led to a sharp reduction in interest.

Price changes over the past year

Compared to Q3 2011, the average price of an apartment has fallen 6.4% and the average house price has fallen 6.7%.

Commercial property prices have fallen 15.1% for retail, 10.8% for offices, and 10.8% for warehouses.

Gross rental yields

Yields are a useful tool showing the relationship between rent and property prices. During the third quarter of 2012, average gross yields stood at 3.8% for apartments, 2.0% for houses, 6.2% for retail, 4.8% for warehouses, and 4.6% for offices.

Cyprus property prices Q3 2012
Derived from the RICS Cyprus Property Price Index for Q3 2012

The parallel reduction in capital values and rents is keeping investment yields relatively stable and at very low levels (compared to yields overseas). This suggests that there is still room for re-pricing of capital values to take place.

Outline of properties used to calculate the index

Apartments: Residential, two bedroom, 85sqm, Medium quality.
Houses: Residential, three bedroom with garden, Semi-detached, 250sqm, Medium quality.
Retail: High-street retail, 100sqm ground floor area with 50sqm mezzanine.
Warehouse: Light industrial area, 2,000sqm, which includes 200sqm office space.
Office: Grade A, City centre location, 200sqm

(All property types used to calculate the index are: freehold, have all licences and permits in place, have their Title Deeds, are subject to VAT and are in a good state of repair).

Methodology

The methodology underpinning the RICS Cyprus Property Price Index was developed by the University of Reading UK and may be viewed by clicking here.

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