Building affordable housing doesn’t come cheap

2 mins read

We heard the Limassol Mayor announcing the municipality’s initiative to construct over 600 housing units to alleviate the shortage of housing units, thus helping reduce the sales prices/rental levels.

He stated the municipality would go into “partnership” with the Governmental body of LDC (Land Development Corp).

He expects this joint venture will provide housing units at sales/rental prices under 20%-25% of the prevailing market rates.

We say well done to the Municipality of Limassol, but we wonder if this goal is attainable and in the municipality’s interest.

  • The municipality will contribute its large plots of land on which the projects will be developed. We assume the land will be costed at the current sales rates; otherwise, it might create problems regarding the subsidizing regulations and interfere with the free market on a non-equal basis.
  • According to the mayor, the development cost, LDC will manage to have fewer development costs, adding that the quality of such projects will be similar to those prevailing but using low maintenance materials (thus more expensive). However, suppose we are to examine projects that Governmental bodies are directly involved. In that case, we note that more often than not, they end up with higher building/development costs and even looking at the student halls developed by the Cyprus University, it reached double the cost of the free market. However, it has no land cost (free) and a borrowing rate of 1%. So how can this be achieved to develop, whereas LDC overheads we suspect are much higher than the private developers?

It is, of course, possible this joint venture will not charge the same percentage for profit and risk, which on average is 20%-25% on the total cost, thus having a sale/rental at lower levels – even if this overcharge is reduced to the level of 10%, this cannot end up in the reduction of the end product by 20%-25%.

  • The administration of such projects, especially after completion, is another matter to be seriously considered. Examining the non-payment of instalments on the sales prices, the sister body of LDC – the Housing Finance Corporation reports that NPLs exceed 50% of the total sales. If we add the problem in collecting common expenses, maintenance and illegal extensions by occupiers are serious drawbacks. More serious is the intervention of politicians and others to respond to all sorts of demands.
  • These expected 600 housing units for sale/rent must be coupled with long-term finance provided mostly by banks/or the housing corporation. We will also find here the intervention of politicians and others, creating all sorts of problems.
  • These new projects suggest the eviction of around 150 families who occupy existing old units of the municipality, paying a minimal rental. The possible payment of compensation and the expected objections on the “new” rents will be much higher than they are now paying (next to nothing). Bearing in mind the low income that most of the new residents have, this will cause a lack of maintenance and various illegal extensions (see the situation of the government refugee housing, which is an embarrassment to the country, with the state having to gift these units to the occupiers to save maintenance costs).
  • The location of such large numbers of various blocks of flats will create ghettos, and we believe the spread of such projects to various locations in smaller apartment buildings of 10-20 units per block may be a better solution (on this point, we suggest locations outside the municipality boundaries).

For these and other reasons, it is our opinion, subject to exchange of other ideas, for the municipality’s land to be sold and the money collected to be used to acquire readymade units for the purpose (legal and tax issues to be considered).

In the UK, the Housing Acts of 1985 and 1988 facilitated the transfer of council housing to not-for-profit housing associations with access to private finance.

As a result, these associations became the providers of most new public-sector housing.

By 2003, 36.5% of the social rented housing stock was held by housing associations.

Antonis Loizou, Real Estate Valuer, Estate Agent & Property Consultant – the views expressed are his own