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The Theory & Practice – Capital Appreciation

We have read recently in a U.K. national newspaper a report on Cyprus, from a disappointed British investor, who has bought a property for (say) £100,000 and now he cannot sell it for more than this. This situation is quite common and we have written in the past in this paper, what sort of returns people should be looking for and for what properties.

However, in a country where there is so much building going on, a potential purchaser has many options, whereas organized developers and estate agents are pushing potential clients towards their own projects. For this reason these individual sellers are at a disadvantage. In addition to the developers themselves, organized foreign estate agents who charge 12%-15% for a commission, direct their clients to those who can afford to pay them, usually the developers. So we could be quite correct in saying that a property, which was say bought last year for £x, its value is now at least plus 6%-8%. This is the theory, however and yes, it is a correct statement, since prices have moved upwards, but these increases are not necessarily a norm, attainable in practice, due to the extensive supply, with most buyers buying something new. So you might have a next door project of 50 units, being sold within 12 moths, whereas your own property, at a lower price, may remain unsold for another 12 months and even for a longer period.

Similarly the expected returns on one’s investment, could, many times be a misunderstanding. Residential (in town) properties can let with a return at a rate of 3½%-4% on their value, but the same must not be expected from holiday apartments. If you buy, in order to let your property, do not expect that clients will be queuing to rent your property, if this property is in a tourist area. Do not expect that because you buy with an equity of 30%, the remaining 70% will be self financed from your rental income, since it does not work out.

So there is a large difference between the theory and practice and care should be experienced in choosing your property depending on what you have in mind.

  • Beach/near the beach properties, will always have a ready demand due to the fact that beach is running out. Again, do not expect a 12 month let at the Protaras-Larnaca area, due to their seasonality, as opposed to the Limassol non-coastal line and Nicosia.
  • If letting is what you have in mind, the best town to choose is Limassol and then Nicosia (mainly apartments), whereas a 3-4 bedroom villa with a pool has a good rental in the Paphos region. If a resale is what you have in mind in order to reap the benefits of a capital appreciation, this is more uncertain and you cannot depend on this 100% when are calculating your finances. Again you should choose the right locations, avoid large projects and locations where there is a lot of new developments going on around and do not depend on the agent’s assurances (for the reasons we have described) necessarily. Buy where the locals do since you have a much wider market of buyers.

So, as a summary, we do suggest that for resale/rental properties, you must choose localities within which the locals buy/let. There is a steady demand for rent and buying, but buying in the “locals” locations, do not expect huge returns. To expect a 6%-8% capital appreciation p.a. in prices over the last year and a 3%-4% rental return is correct but it will depend on circumstances. A client of ours has directed his interest from Paphos to Nicosia (bought 4 apartments) and he got immediately a let for 12 months for all.

Coming back to this unlucky person who has reported his case in the press, we noted that he had his property valued by a self advertised advertising Co!! Although we offer our sympathy to his problem, we must try to use the correct people for the correct job. In this way we will get the best advice available, but the risk is always there, being an investment, stressing the fact that an investment for a resale is not suitable for those who depend necessarily on a quick sale.

By Antonis Loizou, FRICS

Copyright © 2006 Antonis Loizou & Associates Ltd. All rights reserved.

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