Property tax incentive extended

Nigel Howarth
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8

CHANGES to Cyprus’ Property Transfer Fees, which came into effect in December 2011 for a period of six months and subsequently extended for a further period of six months, may now been extended until the 31st December 2013.

The incentives only apply to the first sale of a property, where the contract is dated and deposited at the Land Registry by the end of 2013. Specifically:

  • For those who pay VAT on their house purchase, Property Transfer Fees are waived.
  • For those who do not pay VAT on their purchase, Property Transfer Fees are reduced by 50%.

Property Transfer Fees become payable at the legal completion of a sale and enable the ownership of a property to be transferred from the vendor to the purchaser by the Land Registry.

These tax incentives are designed to boost property sales and stimulate growth in the Cyprus property market by reducing the cost of home ownership.

Further reading

Property Transfer Fees law changes (Greek)

Notes

The incentives do not apply to sale agreements dated prior to 2 December 2011.

The incentives apply regardless of the when the Title Deeds are issued and ownership is transferred to the buyer – be it 5, 10 or 20 years in the future, providing the contract of sale is signed, dated and deposited at the Land Registry before 31st December 2013.

There are provisions in the law that prevent its abuse, for example, by buyers withdrawing contracts of sale deposited at the Land Registry for Specific Performance, changing their dates and then re-depositing them.

Vehicles seized in land payment row

Nigel Howarth
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4

BAILIFFS seized several state-owned vehicles in Paphos on Tuesday following writs filed by owners of land appropriated for the Paphos/Polis highway extension who claim they have not been paid for their land.

The bailiffs took three vehicles belonging to the Paphos Public Works Department, two more from the Land Registry and the Forestry departments, while two cars were seized from the Electro-Mechanical Service Department.

The vehicles were transferred to a fenced-off area at the Paphos District Court and could be auctioned off unless the debts are settled.

Due to the appalling state of the state’s finances, the government is looking to downsize or cancel non-urgent projects and return expropriated land to its owners, providing they haven’t been paid.

Land that was appropriated for various public projects, including the Paphos-Polis highway extension and the Pentakomo Technological Park and it has been estimated that the state owes around €570 million to various landowners.

The government appropriated the land for the highway extension in 2006.

More junk from Standard & Poor’s

David Crowther
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1

STANDARD & Poor’s Ratings Services said today that it lowered its long-term sovereign credit rating on the Republic of Cyprus to ‘B’ from ‘BB’. At the same time, it affirmed its short-term sovereign credit rating on Cyprus at ‘B’.

The long-term rating remains on CreditWatch with negative implications, where it was initially placed on Aug. 1, 2012.

In its statement, S&P said “The downgrade reflects our view that Cyprus’ creditworthiness has deteriorated since the last downgrade on Aug. 2, 2012, as the government has not yet negotiated a support package, while external and fiscal risks have risen.”

We believe that electoral considerations ahead of the presidential poll, scheduled for February of 2013, have contributed to policy inertia. This is in the face of a severe banking crisis, partly triggered by Cypriot banks’ involvement in Greek debt restructuring in early 2012 (private sector involvement) but made worse by the deterioration in banks’ domestic lending books, and the government’s fiscal inaction.”

We see only limited progress by the government in agreeing to a critical loan program with the Troika”.

We still expect a support package to total amounts in line with our earlier estimates over an extended period from 2012 to 2015, but we note the considerable uncertainties surrounding the estimates of the banking sector’s potential capital needs. However, we believe that the results of a deeper government diagnostics exercise will likely reveal further capital needs in the Cypriot banking system, especially if the definition of nonperforming loans for the cooperative banking sector is aligned with European norms. Extra capital needs related to credit losses on the Greek loan books of Cyprus Popular Bank and Bank of Cyprus are also likely to arise, depending on economic developments in Greece”.

In our view, it is highly likely that the burden of recapitalizing the banks will fall on the government’s balance sheet, increasing the risk of a government debt rescheduling. Given the significant constraints on Cyprus’ fiscal flexibility, we view the government’s potential debt burden as difficult to service. It could reach 130% of GDP by the end of 2013, the upper end of our July 2012 estimate”.

In our opinion, Cyprus’ commercial banks–or the government itself–could be forced to reschedule their debt in order to meet the terms of an official lending program. Potential loans from the ESM could be senior to holders of Cypriot debt, and we understand it is somewhat uncertain whether this could trigger the acceleration of debt repayment issued under the government’s medium term notes (EMTN) program according to the provisions of the EMTN transaction documents”.

This could significantly weaken confidence in Cyprus’ financial system; the banking system currently holds nonresident deposits valued at around 140% of GDP”.

It remains our base case that the government will reach agreement with the Troika. This agreement could, in our view, possibly involve a bilateral component from the Russian Federation. We also understand that funds coming from the Troika should be sufficient to meet Cyprus’ external and fiscal needs”.

Given Cyprus’ increasing debt overhang and weak first-half 2012 financial indicators, we have lowered our annual GDP per capita growth expectations to around minus 2% on average for 2012-2014. Included in these expectations is our assumption of a consolidation, mainly on the expenditure side, of about 2% of GDP per year over the next three years, further depressing public consumption growth. Moreover, we project that very depressed credit growth will weigh on weak private consumption and investment, which we expect will contract significantly”.

The CreditWatch placement reflects our view of the potential for another downgrade if Cyprus’ external and fiscal financing pressures escalate. We see at least a one-in-two chance that we could lower the rating again if official assistance is not forthcoming. We could also lower the ratings if we believe the government is not able to fulfil the conditions of a Troika program”.

On the other hand, the ratings could stabilize at their current levels if we see that a program is quickly concluded and if growth prospects, government debt, and external funding needs begin to stabilize”.

Construction decline second highest in EU

David Crowther
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0

ACCORDING to the Eurostat newsrelease published on Wednesday, construction activity in Cyprus fell 15.9% during the second quarter of 2012 compared with the second quarter of 2011. This follows a decline during the first quarter of 17.6%.

The decline is the second highest fall in the European Union after Greece (which fell by 28.6%).

Production in construction also fell in Portugal (-17.7%), Slovenia (-16.6%), Italy (-13.9%), Spain (-12.8%) and Slovakia (-11.5%).

Building construction declined by 5.2% in the euro area and by 6.9% in the EU27, after falling 5.7% and 6.0% respectively in July 2012. Civil engineering decreased by 7.9% in the euro area and by 7.5% in the EU27, after falling 6.8% and 10.5% respectively in the previous month.

In the first quarter of 2012, there was an increase of 5.2% and 6.6% in EU27 and the euro area respectively.

Compared with August 2011, production in August 2012 dropped by 5.5% in the euro area and by 6.8% in the EU27 (but the figures from Cyprus were not available).

Chinese airport deal a dead duck

Elias Hazou
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1

A MULTI-MILLION investment deal with a Chinese company to develop the old Larnaca airport is all but dead in the water, MPs said yesterday.

After reviewing a relevant report by the Accountant-general, deputies of the House Watchdog Committee described the agreement as “legally flimsy.”

Committee chairman Giorgos Georgiou (DISY) told newsmen later that the overriding impression from yesterday’s briefing is that the “entire process for selecting the financial operator…did not meet the general principles of the EU acquis with regard to public contracts, that is to say, transparency and equal treatment.”

AKEL MP Irini Charalambidou said that from the outset the deal was plagued by “complications and misunderstandings.”

After the deal stalled, the Chinese investor informed the Communications Minister in writing that he was withdrawing his interest. He then withdrew the initial withdrawal, “and therefore the interest continues to exist,” said Charalambidou.

MPs left a small window open, saying the deal might yet come through provided the procedures start from scratch and are in line with EU transparency guidelines.

Hermes Airports, the company managing Cyprus’ airports, and the privately owned Chinese firm Far Eastern Phoenix had concluded a deal that could yield a €600 million benefit for Cyprus.

The intended investment concerned developing the old Larnaca airport into a large commercial showroom, bonded warehouses for Chinese goods as well as a small conference centre.

Under the deal signed with Hermes, Far Eastern Phoenix would assume the management of the old Larnaca airport for the remaining duration of the concession agreement between Cyprus and Hermes, that is, 19 years, with an option to extend the agreement to 50 years.

The Chinese company is asking for a longer term lease – 50 years – than the 19 years Hermes is able to give.

As part of the concession agreement, Hermes must hand the airport back to the state in 2031.

Hermes Airports Ltd assumed management and control of Larnaca International Airport and Pafos International Airport on 12 May 2006, under a 25 year BOT (Build-Operate-Transfer) concession agreement with the Republic of Cyprus.

But legal questions have been raised over whether the state can offer the Chinese firm a further 31 years without a tender process.

Extending the deal to 50 years would violate the principle of equal treatment, given that had other investors known about this possibility they might have expressed an interest.

Moreover, publicity over the agreement was limited to the local media.

The deal hit a snag back in August, following allegations that the president’s top diplomat and his wife were personally involved.

A Justice Ministry probe is currently looking into whether Marios Ieronymides, the head of President Demetris Christofias’ diplomatic office, committed any disciplinary offences in relation to a deal between a Chinese investor and airport operator Hermes.

Ieronymides denied there was any wrongdoing on his behalf, but resigned nevertheless, acknowledging that his presence at the meetings was not appropriate.

The deal has been thrown into doubt as the Chinese businessman withdrew his interest after his company found itself in hot water over the allegations.

Chinese media spoke of a government official accused of corruption and that put his company on the watch list for corruption, which is strongly punishable under Macau law.

The future of the deal seems to be linked with the resolution of the case. Next week The House Watchdog Committee will discuss the matter further in the presence of the Communications Minister Efthymios Flourentzou.

Property sector will act as a further drag

Editorial
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3

SEVEN economists recently gave their views on the prospects for the Cyprus economy in 2013 to the Financial Mirror. Ioannis Tirkides, Economic Research Manager at Marfin Popular Bank, had this to say about the island’s property sector.

Economic developments in recent months have been taking a turn for the worse. This is owing to the uncertainties surrounding the economic adjustment programme that will be required of Cyprus for financial assistance from the EU bailout mechanisms and the IMF.

A long delay in finalising the programme is causing considerable uncertainty and makes things worse. Liquidity constraints and continued deleveraging on the part of commercial banks are causing a credit crunch with consequences for the real economy.The economic adjustment programme revolves around three key themes: fiscal consolidation; bank recapitalisation and financial regulation; structural reform to boost competitiveness and support balanced growth. The corresponding measures will have a lasting contractionary effect and no matter how viable we may think the economy is in the long term, there will be considerable pressure in the short and medium terms.

It is now also realised that the property sector may be more of a problem than we initially thought. Banks, in the boom years, lent considerable amounts of money to property development and housing. Property prices, when judged against income levels and corresponding yields, are high and will necessarily have to adjust. This adjustment in a context of an economic adjustment programme will be faster and deeper than initially thought and will have a significant bearing for bank lending ability.

Even though developments both in Europe and in a global context are taking a turn for the better following decisions by the Federal Reserve and the European Central Bank to provide support and liquidity; the recession in the Cyprus economy that started in the second half of last year has a way to go still.

In this context we downgrade our outlook for 2012 and 2013. We expect real GDP to contract by 2.1% in 2012 and by 1.5% in 2013.

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