Returns on real estate

The returns (yield) on real estate in Cyprus has always been at the lower end. Return (yield) is the income of a property let in the open market (i.e. the rent) as a proportion of the prevailing market value.

The returns are historically low since prior to the 2008 real estate crisis there was a healthy capital appreciation for most properties amounting to 5-7% p.a. These yields at the time (2008) compared with the deposit rates at approximately 5% showed a return of 4-5% on real estate and it was reasonable if one adds on top the capital appreciation.

Nowadays, the situation is different and returns have been reduced for apartments to around 4%, whereas there is no expected short-term capital appreciation. On the other hand, deposit rates (savings) are low at the 1.2% level (in Cyprus), whereas abroad it is much less (0.5% or even negative).

The tragic situation of Cyprus as a result of the 2013 bailin, has encouraged people to invest in real estate since, part of the market at least, even doubt the stability of the local banks.

Of course, out of the rental value/income one must deduct taxes and the other charges that go with the ownership of real estate (provided again that the tenant undertakes his own common expenses and other charges). So, at the end and assuming a 30% for expenses (net +/-2.5%) but again depending on the nature or property real estate investment by comparison to deposits has the upper hand (Governmental bonds excluded).

Real estate has the advantage that you can look at it, touch it, plan for its future use, keep it as a dowry (for those who still use this) and mortgage it to secure a loan.

We hereby provide you with a historic table of real estate returns which is not strict but can be varied depending on many factors. The table (prepared by the local RICS association) shows not large variations over the years (20102016) but higher returns are shown for high cost investments which entail higher investment risk and uncertainty, as well as increasing maintenance/management cost. As such, these show a return of 6-6.5%, hotels 10-12%, etc. Mind you, each type of investment must be compared individually bearing in mind its age, quality, prospects etc. The less attractive the property is, the higher will the required return be.

During the initial post-2013 years, large scale investors, mainly from abroad, required a return of 6-7%, but as the economy got better it was reduced to 6% and nowadays is around 5.5% (commercial properties).

What is interesting is the return shown for villas to let, especially in the Paralimni-Ayia Napa and Paphos regions. These villas to let are usually not declared for tax purposes (be it illegal) since tenants (short term) do not benefit by declaring it.

There is an increasing demand for these short lets and as an indication a villa of 3 bedrooms (not on the beach) at Protaras is let for EUR 2,500-3,000/week (during peak months) and EUR 2,000/week off season with a total let period of 6 months. The more attractive the property and proximity to the beach, the longer the let period and of course the income. At the same time 4 bedroom villas on the beach front have a letting rate of EUR 3,500-4,000/mont (peak) and EUR 2,500-3,000 off season. These rates refer to the Protaras area and much lower for Paphos. Of the total income one must deduct 25% for expenses/maintenance, agents fees, etc.

The Famagusta region is the subject of a general upgrade including the under development Ayia Napa Marina, the marina at Protaras (pending) and the much awaited golf course, all of which will add to the region’s attraction and value extending the annual let season even more. Will these rental levels be sustainable in the immediate future? It is difficult to say since this upsurge of demand came about as a result of the large increase in demand for hotels (as a result of the Turkey-Egypt situation). So it is not certain how long this brisk demand will last, but in the meantime it is one of the better income producing options.