It is a fact that in recent years, there has been a noticeable increase in the level of residential rents, especially in those located within town centres and universities or colleges.
On the one hand, the government is trying with various means and incentives to contain rents; on the other hand, it is handling the whole issue sloppily and amateurishly.
Rents are determined by supply and demand, always taking into account the requirements on the part of landlords and investors.
And while there is a way to contain rents, no effort is being made to reduce the investment cost that will help.
The main element in cost reduction is a 19% VAT charge on the entire investment.
VAT can reduce or contain rents without depriving the state of this income.
So, while for owner-occupied housing, the VAT is reduced to 5%, for rental, the VAT is 19%. Therefore, the purchase of an apartment for €100,000 could have been (with 5%) €105,000, increasing with 19% VAT to € 119,000.
If we assume the investor is (now) looking for a return of 3% (on cost) minimum, the rent with 5% VAT is €3,150 (c. €263/month) with 19% increasing to €3.570 (€298/month).
Of course, the difference increases as the cost of the investment increases.
To not deprive the state, I suggest reducing VAT to 5% applies to the rental period with a maximum of 10 years.
If the owner disposes of the property, they will have to cover the difference (of 14%) in the increase (in proportion to 10 years).
To avoid false statements, the landlord must declare annually their rental income, which should be checked with the Income Tax declaration.
In this way, we achieve reduced rent without the State suffering damage, although collecting the entire amount of VAT will be postponed.
Another element that will help reduce rent for student apartments is the assumption of rent payment by the universities and colleges that have the possibility of imposing sanctions (e.g., non-
issuance of the degree, transfer to the next year).
In this way, and having the investor increased security in meeting the tenant’s obligations, we consider a reasonable rent reduction of 15%.
This approach reduces rent by 5% VAT or about €225/month.
This approach is not very popular with academic institutions that will take on an additional burden but can offer their students cheaper rents (similar system in the UK).
These rentals should be excluded from the rent control laws, while the existence of any dispute between the owner or university should be decided by summary procedure through a designated arbitrator or the technical chamber ETEK.
The current situation with 19% VAT strongly discourages investors of scale.
In our recent involvement in the construction of 152 proposed student residences in Nicosia and after securing the Town Planning Permit, the project was postponed as unviable due to high rental costs mainly derived from 19% VAT (€1.5 mln needed by the investor for VAT purchase of land + development construction costs).
Without the involvement of the private sector, whatever the state tries, it will not achieve the goal of containing rents.
The use of the private sector can build where demand is and meet the quantitative level of quality, while the use of public or municipal land, with the collaboration of the state Housing Development Corp., will face problems.
The measure we propose can also be adopted in existing buildings or units that are upgraded for rental purposes (the goal is to increase the supply and upgrade units).
Apart from building works, one needs to consider solar or photovoltaic panels, with the cost of the upgrade being charged at 5% and not 19%.
This trend of rents at relatively high levels is expected to continue considering the increase in construction costs; therefore, the resolution of the issue is most urgent.
By Antonis Loizou FRICS – Antonis Loizou & Associates EPE – Property Appraisers, Property Sellers & Development Project Managers
