Is black money helping the real estate market?

Undeclared income, a sudden upsurge in business for some sectors and limited places to deposit one’s income, are driving some investors towards real estate investment. To this end the somewhat uncertain future of some of the local financiers, the difficulty in exporting one’s money abroad (with questions asked) and low deposit rates, have directed the attention of some cash-rich individuals and firms towards local real estate investment.

Successful doctors (based on recent reports), enjoy an average annual income of EUR 200,000, with a large percentage being untaxed, since they often cheat the system by being paid in cash, whereas the crumbling public health care and the long waiting lists are all the best for the private clinics and their doctors.

Another group that nowadays is “in the money” are a number of advocates (lawyers) who are loaded with cases coming from lenders chasing the non-performing loan (NPL) offenders, (I’ve heard of a Nicosia firm having a retainer fee/income of EUR 1.0 mln p.a. from one lender) whereas a third category, some accounting firms, especially those who deal with foreign companies, are also in the category of cashrich firms (I heard of one being involved in a EUR 5 bln joint venture between two international firms, charging EUR 5.0 mln for its fee).

This sort of income is not uncommon abroad, but they are out of reach by local standards.

In the salary scene, we now hear about incomes of about EUR 200,000 of individuals, plus benefits of all sorts.

Leaving all these behind and following the undeclared income, a recent case of a kebab house in Nicosia impressed us regarding the Tax Authorities’ investigation. The kebab house, notwithstanding its evident huge volume of work, declared a very low income. The Tax Authorities found out where the kebab place bought the wrapping paper for the “pitta” and by simple math calculated an added tax of EUR 200,000! Of course, there are other businesses of a similar activities and profit margins, such as those that do not issue bills, nor receipts. On top of this, we have the cowboy estate agents who demand (illegally of course) to be paid commission “under the table”, whereas others agree on a sales price with the owner and reap the difference in the sales price – it needs the cooperation of the buyers and sellers mind you, whereas in foreign sales, especially to the Chinese with a 20% commission with back to back deals from companies abroad is yet another source.

It is no wonder, then, that some locals are buying high- end holiday homes and expensive cars, which are evident in the streets. Although the Tax Authorities are becoming more and more efficient, they are faced with a most difficult task, having the Tax Dept. staff reduced by 20% over recent years.

Note that holiday homes in the region of EUR 1 mln are not only bought by the privileged Russian/foreign market, but locals are coming into the market for the same purpose. The marina units (sales prices of EUR 7,000-10,000/sq.m.) also have their fair share coming from the locals, whereas REMU (the Bank of Cyprus real estate management arm) reported sales concluded by locals into the millions.

All this wealth which is kept by a sector of the market, is finding its way partly towards local real estate. We might not see the pre-2013 situation of the large 1,000 sq.m. mansions, which appear to be abundant, but see the social/fashion magazines with numerous “dressy” women posing with expensive dresses in the region of EUR 3,000!

So, to an extent this under-the-table/black money wealth is helping the local real estate market, whereas the registration of foreign companies (in Cypriots ownership) is not unknown. For a recent sale we were dealing with, the introducer (Cypriot) who issued a commission bill in favor of a company in Sri Lanka (we could not believe it) which was duly refused, mind you.

What more can we say?