Incentives for housing to let – Affordable Housing
It is a fact that there is a shortage of suitable housing units to let as a result of which rental levels have increased over the last couple of years by 20%-30% depending on the location and town, with the highest increase referring to Limassol and for all towns apartments near the universities and colleges, as well as units within the towns’ centers.
The Government in its effort to encourage development of housing units for let, has introduced incentives for those investors who are prepared to develop such units and let them for a period of at least 8 years.
The incentives are as follows (given in a summary form):
- It applies to those areas that their pre-incentives density level is at least 100%. This is wrong since the University of Cyprus, which has a major problem, its immediate area has a density of 80%-90% and as one moves further and further from the University the density increases. This is wrong in our opinion since students wish to reside as near the university as possible. As such most suitable localities are excluded to an extent.
- There is a fixed period for the buildings completion which is reasonable.
- It applies to those projects that at least 70% of the total number of units are offered to let.
- The minimum size of the units is now reduced providing smaller units to let (the prevailing sizes are very large in comparison to the affordability of the units). This is a plus.
- For those projects which cannot accommodate full parking, the developer must compensate the local authorities by approximately €2.500-€3.000/parking spot not provided. This is a mistake and it is an antiphasis for the incentives/goal.
- Units to let bear an increased development cost, that of the VAT (which cannot be recouped) which amounts to 19%. So, if an apartment of 100 sq.m. costs €150.000, the 19% charge will increase the cost by approximately €29.000, which with an expected rental income/return of 4%, it means that the rent will increase by approximately ±€100 p/m. This is wrong. We have suggested to the Government that the VAT should be reduced to 5% and in the event of sale prior to the 8-year period, the developer to pay back the difference (19%-5%) = 14%.
As circumstances stand at present any efforts regarding added developments and affordable rents will not happen prior to a 2-year period (permits, construction period etc.). In the meantime, rents will continue their upward direction, making the problem worse since the number of students/renters are increasing at a faster rate than the supply. This measure must be combined with the statutory control law, which protects the tenant from eviction (in case of no rental payment) which discourages investors to let their units. The recent proposal regarding the statutory rents is a move to the right direction (the bill on this subject has been voted last week and we expect that it will become law within the next 15 days).
On the 12.11.2018 we have submitted our own proposal to the Minister of Interior giving full details on the subject as well as to the various political parties (no response so far) expressing our reservations on the success of the incentives. Sure enough, the incentives have failed to attract investors and the Government is now searching for new relaxations on the subject (we hope that this time we will be heard).
Now that deposit rates are at their lowest level and even the introduction of penalties for a deposit, it is time to examine such incentives, be it it requires a large amount of investment money. The Cyprus property market being small and volatile on such investments it requires a fallback position in case the market experiences over supply, increased competition/quality matters etc. So, do not base the design only on the “for let” units, but keep in the back of your mind the alternative to sell as freehold the units in the future (be it after the 8 year investment period limit). As such restrict the design to spacious one-bedroom units and to two-bedroom units suitable for family living (initially this may not be more attractive than the smaller units to let, but the future must be taken into account).