The construction industry, the largest employer on the island and described by many as the bastion of the economy, is under threat and constant attack according to Costas Michaelides, Chairman of the CSE-listed Costas Michaelides Constructions.
Long delays associated with the issue of permits, rampant violation of safety rules by sub-contractors, massive cost increases in prices and ever increasing government taxes and fees are some of the reasons cited by Michaelides as threatening the future of the industry.
“It’s the only bright spot of the economy, yet it is getting a hit from all directions,” says Michaelides, adding that most of the blame lies with the government methods and lack of interest in placing proper procedures.
Permits
For Michaelides, a prominent developer with many years experience in the industry, the long delays associated with the issue of permits, both at government level as well as by the municipalities and then the Land Registry, is simply not acceptable.
“The system sucks. Blame it on the whole mentality or lack of proper organisation, but no one can justify the big delays. Unless you run after your file, one will never get a permit.”
Michaelides has harsh words to say about the way the government breaks its own rules when setting up its own offices, most of which don’t have the relevant permits, yet it demands that developers abide to the rules.
VAT & transfer fees
The industry is up in arms against the decision to impose a 15% VAT on new property, something which for Michaelides is a nuisance but one that can be tolerated in view of the island’s EU commitments, but he has harsh words to say regarding the excessive transfer fees that risk killing the industry.
At the moment, the government imposes a 3% transfer fee on the first CYP 50,000 value of the property, 5% from 50,000 to CYP 100,000 and 8% for CYP 100,000 and above.
Add in the initial costs that a developer is burdened in separating the land, electricity authority and municipality fees and permits, and according to Michaelides, the government is taking 1/3 of the property value in fees and taxes.
“The government is out to kill the goose that lays the golden egg. At this rate and in view of the other problems with which the industry is confronted with, I would not be surprised if the industry starts to retreat,” said Michaelides.
Price hikes
Michaelides acknowledges that construction material prices are rising because of the high demand from China, India and other Far Eastern countries that have pushed steel, aluminium, cement and other raw material prices through the roof, but he says others are also exploiting the situation.
He cites the example of bricks, the price of which has increased by 40-50% during the last two years, and is now CYP 210 per thousand, but says according to his sources, the cost of manufacturing of bricks is only CYP 40 per thousand.
“Did the price of sand from which bricks are made go up that much? There is no checks as to who is charging what and under what pretext,” says Michaelides.
Foreigners
One of the great sources of demand in recent years has been from foreigners buying villas, houses and apartments, but that is also under pressure due to the imposition of the VAT and transfer fees, inadequate service at the Land Registry and Municipalities and heavy competition from the occupied areas.
Michaelides says a number of his Israeli clients cancelled orders as they found out that prices in the occupied areas are at one-third of those prevailing in the government controlled areas.
He also criticised the level of service at government offices, lack of properly trained staff and facilities as casting a negative image on Cyprus in general.
“People should realise that foreigners can choose from so many other destinations and if we are expensive, at least we should offer a superior service, but even that we are unable to provide,” said Michaelides.
Quality
With an increasing number of the labourers coming from abroad, Michaelides remembers fondly the days when Cypriots used to do all the work and pay attention to detail.
An even bigger worrying situation is the entry of unauthorised foreign sub-contractors, who are undercutting prices but delivering very bad service, with Michaelides worried that this could create major problems in future years if there is a major natural disaster.
Lower rates
The only good thing helping the construction industry is the decline in interest rates, which is countered by the banks adding charges for study fees and other hidden costs.
But for Michaelides, the biggest problem still to come is the pending Land Registry law, which if passed in its present form, will have catastrophic impact on the market.
They want to increase the fees, and change the way the banks will be allowed to confiscate and then auction off mortgaged property tied to problematic loans, says Michaelides, adding that would really shake the country and lead to a major recession.
Trends
Faced with ever rising prices and high cost of living which is not compensated with increasing wages, the public is shifting to apartments, mostly 1 & 2 bedrooms and shunning larger units.
The average price of a 1 bedroom apartment is CYP 45-50,000, that of a 2 bedroom CYP 80-85,000 while a 3 bedroom is fetching around CYP 90-110,000.
Some 40% of the public prefers houses, but are heading for the suburbs and out of town where land is cheaper.
“The more people are squeezed, the more they will likely cut back, which would mean a slowdown in the construction industry, the only bright spot of the economy. After that, I don’t know what will happen to many businesses and in turn government revenues,” warns Michaelides, pointing out that unless swift action is taken now, things will get very tough before they get better.
