It is a fact that new flat prices have been rising gradually during the past couple of years.
The factors pushing prices up are many. Here are some of them:
Firstly, almost no flats were being built for Cypriots during the past decade due to a lack of demand. It is only natural that now that there is a demand, with no equitable supply, prices are being pushed up. Simply put, demand increases prices.
Second, construction of new flats was at a minimum. However, now it is picking up at a fast pace, maybe too fast.
A third reason is that construction costs are rising due to rising raw materials, salary hikes and increased state requirements (demands for energy efficiency for example), pushing prices up.
Finally, banks are promoting housing loans with favourable conditions, demanding a mere 2% interest rate, further boosting demand for flats.
Given all these facts it is only natural that an investor buying a flat at a higher price, burdened with a 19% VAT, will seek a higher rental price. A case in point follows:
A decent 2-bdrm flat priced at € 220,000, plus VAT, ends up costing €261,000. Factoring in the cost to furnish it and put in new appliances before it is rented and you end up with a flat cost of € 270,000.
After doing the math what is the yield the owner should be aiming for and consequently what should the rent price be?
We estimate that taxes aside, the owner has expenses/costs representing about 20% on rents, paying for renovations and periods the flat is vacant.
We disregard in our example potential bad payers and legal costs.
Taking all these factors into account, for a 2-bdrm flat to have a 4% yield it must fetch a €1,125/month rent.
It is now easier to understand that while rent prices have gone up but not so dramatically. An owner still has to struggle to achieve lower than 4% yields.
We are always referring to properties in relation to the middle-class Cypriot, not foreign buyers/tenants which is a different market altogether.
The sudden demand for rental properties has helped push up rental prices for new as well as older properties, in relation to what was the norm about 3-4 years ago. We must not forget however, that the rent drop around 2013 was steeper that the recent price hike.
Rents must be in direct relation with property prices. The sudden rent hikes or reductions of the past 6 years is considered a temporary break. Rents and property values must increase at a higher rate than inflation and must have an annual yield of 3-7% depending on the age, type and condition of the property.
Rounding up we have to point out that the property market seems to be reaching a balance, as supply of new flats is picking up, keeping prices and rents within reasonable limits. Unreasonable voices by political parties and organisations are there only to help pick up votes. If one takes into account the standards of living on the island in relation to rent prices, it is easy to understand that Cypriots are in a more favourable position than most other European citizens.
We expect that barring any unfavourable developments over the next 1-2 years, we should be expecting a small increase both in flat prices and rental prices concerning flats for Cypriots.
Written By: George Mouskides
Director FOX Smart Estate Agency
Chairman Cyprus Property Owners (ΚΣΙΑ)
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