02.09.2023
In recent years, there has been a noticeable increase in residential rent levels, especially in city centers and in university or college areas. On the one hand, the government is trying to contain rents through various means and incentives; on the other hand, it resolves the whole issue carelessly and amateurishly.
Rents are determined by supply and demand, always taking into account requirements from landlords and investors. And while there is a way to contain rents, there is no effort to reduce investment costs that could help.
The main element of cost reduction is the levy of 19% VAT on the entire investment. VAT can reduce or control rents without depriving the government of that revenue. So, if for your own housing VAT is reduced to 5%, then for rental VAT it is 19%. Thus, the purchase of an apartment for 100,000 euros could amount (at 5%) to 105,000 euros, increasing to 119,000 euros including VAT of 19%.
If we assume that the investor (now) expects a return of at least 3% (of cost), then the rent with VAT of 5% will be 3,150 euros (about 263 euros per month), and from 19% will increase to 3,570 euros ( 298 euros per month). Of course, the difference increases as the cost of the investment increases.
In order not to deprive the state, you can reduce VAT to 5% in relation to the lease period for a maximum of 10 years. If the owner sells the property, he will have to cover the difference (14%) in the increase (prorated over 10 years).
To avoid false statements, the landlord must declare his rental income annually, which should be reconciled with his income tax return. In this way, it is possible to achieve a reduction in rent without harming the state, although the collection of the entire VAT amount will be delayed.
Another element that will help reduce rents for student apartments is the assumption of rent payment by universities and colleges that have the ability to impose sanctions. Thus, and also if the investor has greater confidence in the fulfillment of the tenant’s obligations, a reasonable reduction in rent by 15% can be considered. This approach reduces the rent by 5% VAT or approximately 225 euros per month. This approach is not very popular among academic institutions, which will take on the additional workload but may offer cheaper rent to their students (a similar system operates in the UK). Such rent should be excluded from rent control laws and any dispute between the owner and the university should be resolved summarily through an appointed arbitrator or the ETEK Technical Chamber.
The current situation with VAT of 19% greatly discourages large investors.
Having recently been involved in the construction of 152 proposed student accommodation in Nicosia, and after receiving city planning permission, the project was shelved as unviable due to high rental costs, mainly associated with 19% VAT.
Without the participation of the private sector, no matter what the government does, it will not achieve the goal of rent control.
Using the private sector will help build where there is demand and meet the required level of quality, while using state or municipal land in cooperation with the State Housing Development Corporation will face problems.
The proposed measure could also be adopted in existing buildings or properties that are being upgraded for rental purposes (the aim is to increase supply and upgrade properties).
In addition to the civil works, solar or photovoltaic panels should be considered, with the cost of retrofitting being 5% rather than 19%.
This trend of relatively high rents is expected to continue given increasing construction costs; therefore, resolving the issue is the most urgent.
