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Empty land should be taxed

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For the past 15 years, I have expressed views on the need to tax vacant building plots and development land which is not in any use.

Approximately 40% of the development land in Cyprus is vacant, while at the same time, there is a shortage of development land for sale, pushing prices to high levels, which the Cyprus public cannot afford.

This ends with the state needing to enlarge the development zones (usually every five years).

In contrast, the constant increase of land prices is causing owners to retain them for future capital appreciation or use as a form of mid to long-term saving by the family.

So it is with great satisfaction that I noted the Municipality of Nicosia is suggesting the taxation of vacant building plots and development land within the municipal area to encourage development, disposal or better planning.

The tax referred to increases by 20% of the overall values and tax levels as the land registry establishes them.

Notwithstanding that the 20% increase is not enough to encourage the achievement of the goal, it is a positive measure in the right direction.

The problem which remains is how this tax hike will be enforced.

We have to look into the legalities of this proposal. Is it constitutional?

And of course, the reaction by large landowners (e.g., the Church and others) where I expect small politics will come into play, especially during an election period, with the political parties competing who will come up with free benefits and tax cuts.

Some such ‘bonuses’ were the recent electricity VAT reduction to 9%, the new pension scheme for 20,000 civil servants, costing the state approximately €70 mln p.a., and so on.

What, then, defines a vacant plot?

Apart from the obvious, any plot which is not developed by at least 50% of the prevailing building density should bear the tax increase; otherwise, we will see plots having a building density of say 1.000 sq.m. classified as ‘developed’ even if a small building of, say, 50 sq.m. is on it.

The expected taxation will encourage development, holding property prices at a constant level to be increased every five years by approximately 20%.

In addition, buildings in a derelict condition or out of use for a continuous period of 5 years should be classed as vacant land.

In addition to proposing a stick, taxable properties should also be offered a carrot, e.g., an increase in the building density (say 5%) from the prevailing if development takes place within five years from the last assessment (and fully completed).

At the same time, development land which cannot be developed, e.g., they have no access, the surcharge of 20% to be passed on to the withholding land.

This is a good effort by Nicosia Municipality, and for this reason and because it is a measure that will create a lot of objections, we suggest a grace period for the initial five years.

This sort of enforced sales and development will meet a lot of objections, especially with the presidential elections not too far.

Still, other countries, e.g., the U.K., have adopted more stringent measures, where vacant properties give the right to the local councils to take them over to accommodate homeless people who have no means to find housing.

A similar effort was introduced by the Planning Act of 1990, where a 20% betterment change was suggested if government projects caused an appreciation of property values.

This 20% was difficult to implement, whereas the legal cases and cost for objections were estimated to surpass the charge.

In this case, the taxable amount is already assessed, and as such, the 20% increase will be a simple calculation.

Similarly, Nicosia Municipality is suggesting the owners’ duty to provide a certificate on the sound (or otherwise) structural condition of buildings and this for the benefit of public health and safety.

Unfortunately, this is difficult to implement due to no majority support among MPs.

Had any government had an absolute majority, we would see a lot of improvement in local governance.

 

Antonis Loizou, Real Estate Valuer, Estate Agents & Property Consultant