Buying or Renting Property Cyprus - Real Estate Articles

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Buying or Renting Property (Cyprus)

The everlasting question whether somebody should buy or rent a property, is not easily answered. The answer depends on many factors, like the particularities in tax reductions, which possibly vary from one person to another, and from company to company, whilst the reasons for your choice change over time, and overturn your initial decision.

In simple matters, for example, apartments, the purchase price of a two bedroom apartment is now around Cy£90.000, plus transfer fees etc = total amount Cy£96.000. The rent for such an apartment is around Cy£280 per month and the return on the investment +3.5%. Deduct from this percentage the land taxes, the vacant periods, repairs and the non-payable rent from your tenant and the level is reduced to +3.2%.

On the other hand, if it’s taken into consideration a middle increase sale price on such units at a rate of 5%-7% (from now and in the future) per year, the total return on your investment is around +8%; a satisfactory percentage according to today’s data. Thus, the purchase of an apartment pays. At the same time, you have to have in bear in mind that in the case that you sell your property, you will pay selling expenses (i.e. commissions/ advertising) and taxes (20% on the profit). As a result the yearly 5%-7% increase (even in 5 years) is not actually 5%-7%, but it is around 4%-5% (bearing in mind also the tax surcharges), which reduces the return to 7%-8% (income + surplus value) per year.

Of course the problem for the tenant (if you decide to rent) is that one day you might be out in the streets because the owner needs the house. This possibility/fear- especially if the tenant’s children have created friends/schools in the neighbourhood etc- is an obstacle and a pressure for a subsequent purchase. Thus we notice very few long-term tenants in housing units (apart from the ones that have financial problems or it is a matter of attitude). Of course each one has to see if they can afford it and to compare matters of priority (i.e. purchasing a car, the children’s studies etc) and to postpone the decision to buy their own house and decide on renting.

The matter of housing a business (shops/offices/warehouses etc) however, is different. Due to his investment, here the tenant has to think about tying his money up in a property purchase, instead of using the money for his business. A well-known owner of department store, told us that ‘…I do not want to own property, because if I could sell it and remain as the tenant, I would have received millions of pounds, which would have given me a bigger return than my business activities’. This perception - sale and lease back - is something common abroad. In Cyprus though there are two main problems.

Firstly, the businessman does not always find what he is looking for, so he is forced to build it himself (of course a good alternative solution are the B.O.T. – projects that the government adopts) and secondly, he uses the property as a security to get a loan for the business. Because in Cyprus there are few businesses that the financiers can rely solely on their Audited accounts, businesses that do not own their property might have problems in getting a loan.

The other thing is, that in Cyprus it is a normal phenomenon for businesses to expand in the future so the purchase market for an i.e. office, will make its future expansion difficult, because they will be obliged either to pay the neighbour in order to buy his (at a higher cost) or to sell this office and buy something bigger (but with many matters that involve taxes and movements).

If though we compare the purchase of a modern office for Cy£1000m² and it’s rent for Cy£6.0m²/montly, the return is 7.2% per year. Taking into consideration the vacant periods etc, the return is reduced to 6%-6.5%. Adding 3% rate yearly increase makes the total return around +9% - again a satisfactory return that supports the purchase.

Of course the yearly total return of 6%-7% will help towards buying instead of renting and will reduce buyers for rent. However, nobody can be sure which of the two is the best, despite the personal need ‘to own some property’.

Company: Cyprus Properties for sale - A. Loizou
Author: Antonis Loizou
Author email: webmaster@aloizou.com.cy
Date: 1 March 2007

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