Rent increase freeze is a bad decision
The Council of Ministers has wrongly decided that there will be no rent increase for properties that fall under the Tenancy Law. The decision concerns the period between 22/04/2017 to 21/04/2019 and sends out a negative message to both local and foreign investors.
The 1983 Tenancy law regulates properties built before 2000 in specific areas and for which there is no rental agreement in force. It is an anachronistic legislation aimed to protect tenants in periods of state of emergency, such as was the Turkish invasion in 1974. The law would serve a purpose in periods where there is little supply of rental properties and considerable demand. Legislators were aiming to protect people from unusually high rents.
Market trends during the last decade, however, as well as current conditions, are pointing to the exact opposite direction. There is an abundance of properties and few interested tenants. The government sets the ceiling percentage rise every two years for the following 24 months. The ceiling was set at 14% for some decades. Then it was reduced to 8% for 2011-2013 and then was set at 0% for 2013-2015 and 2015-2017.
The present administration has been boasting for quite some time that the economy is on the rise, growth is picking up, all supported by a healthy Gross National Product (GNP). We all expected a rise of rent ceilings for 2017-2019 based on the above claims. We had been expecting the rise to be anything between 5% and 10%. Despite all supporting facts the government, in its poor judgment, decided to stick to a 0% increase. The decision gives rise to a number of questions: 1. How will foreign investors invited to put money into the property sector interpret this decision? They will surely infer that property prices as well as rents are not expected to rise in the future – or at least for the next two years.
2. What will happen to the huge reductions offered by landlords and enjoyed by tenants during the 2013 economic crisis? When should they expect the rents of their properties to bounce back?
3. What is to become of the owners unable to service their loans due to low rents ending up as the NPLs?
Taking all these into account it might not be wise to buy property with the intent to rent it out. Low rents, in relation to the purchase value of the property, are the result of the tenancy law. It is also the result of a bad economy during the last decade. On top of everything else, owners also have to struggle with tenants who never pay their rent and cannot be forced to vacate the properties due to the tenancy law and a snail-paced legal system.
The government and its ministers will be doing all a favour if they come forward and explain the reason behind such a wrong decision. Are they trying to reduce the market to ruins? Are they trying to discourage new investors, or are they perhaps telling us, indirectly, that the economy is failing?