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12° Nicosia,
05 February, 2023
 
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The demand for new homes is dwindling

Due to increases in construction costs, borrowing costs, and VAT, demand stalled just before the end of 2022

Maria Eracleous

The large investments and development projects mentioned by Minister of Transport and Works Yannis Karousos in his ministry's recent project presentation may have kept the construction and real estate sector afloat until 2022, but the industry still faces challenges. Surprisingly, the Bureau of Statistics data shows, on the one hand, an increase in projects such as road construction and civil engineering projects, while on the other hand, a decrease in residential buildings. In particular, according to the latest data, the number of residential units has decreased by 4.6%. The residential buildings category recorded a 7.6% decrease in the January-October 2022 period compared to 2021.  In terms of floor area, the decrease is - 8.2%, and in terms of value, it is - 6.2%. Single-family homes fell around 10%, double-family homes fell 4%, and mixed multi-family homes rose marginally. To highlight the difference between civil engineering projects and the other categories of projects, it is worth noting that civil engineering projects increased by 12%, while road construction increased by 23.4%. Non-residential buildings increased in value by 32.9%, while road construction increased by 68.9%.

VAT and interest rates

Small Class D and E developers should experience less turnover as the demand for private housing declines.

As Central Bank Governor Constantinos Herodotou noted last week, we are entering a period of high-interest rates. At the same time, construction costs are rising, and there is uncertainty regarding the regulation of VAT on first homes, which the new government will be asked to resolve. These factors are expected to keep the interest in new homes at lower levels. Stavros Gavriel, the president of OSEOK, told K that the most recent proposal stated that a reduced VAT rate of 5% on the delivery or construction of a house will only apply to the first 170 square meters of a house with a total area of 220 square meters and a maximum price of 340,000 euros and 90 square meters of an apartment with a total area of 110 sqm and a maximum value of 200,000 euros. He expressed the view that these provisions will create difficulties in the market and deprive the middle class of the purchasing power to acquire a private house or apartment.  In his opinion, the maximum value set is too low, particularly in light of the current real estate price environment. In addition to burdening consumers and developers, the rise in interest rates on mortgages raises borrowing costs, limits consumers' access to credit, and exacerbates the issue with the supply and demand for real estate.

Plus 30%

Due to the rising cost of construction materials like iron, structural steel, and steel, as well as the issuance of 10,000 work and residency permits to qualified staff, the cost of building a new home has already increased by about 30% this year compared to 2022.  Due to these, Cyprus' real estate market remained strong and avoided a recession despite rising prices. Clearly, the need to house the younger generation with smaller budgets is just as important to the real estate market as large developments and expensive homes. It is anticipated that the demand for housing in this category will continue to decline through 2023. The Class D and E developers—small businesses engaged in the development of private housing—are more susceptible to increases in construction costs as smaller businesses will also be negatively impacted by this decline. We can see it in the contracts we sign; since fewer contracts have been sold in the last six months for a higher price, we can infer that it is for larger developments and not for residential," he comments.

The price of going green

According to the developer's president, property prices will continue to rise steadily in 2023. He does not anticipate a decrease in the cost of raw materials, which would lower the final cost of the property and make it more accessible to small and medium-sized buyers. The cost of raw materials and energy both cause businesses to incur higher expenses, which are then added to the final cost. These costs are not anticipated to decrease any time soon, so a correction of prices to levels seen before 2020 is not anticipated.   The cost of the green transition, which he said would have an impact on the construction industry, was added to the equation. A recent presentation mentioned that 40% of the world's carbon emissions come from the construction industry. He emphasized that using environmentally friendly building materials, renewable energy, smart lighting, and energy-efficient heating and cooling systems are all goals. However, it should be assumed that the new, more intelligent buildings will also result in higher construction costs.

Multi-million euro projects

The mobility recorded in road construction is attributed to the Ministry of Transport. As mentioned in the recent presentation of the Ministry's activities, the main projects that are currently under construction include the Nicosia perimeter road at a cost of €72.3 million, the Astromeritis - Evrychou motorway (€88.6 million), the Polis - Pafos motorway (€87 million), the Limassol - Saitta road (€31.1 million), the Hippocrates and Argyroupoleos Avenue (€30.7 million), the Larnaca - Dhekelia coastal road improvement Phase C (€17 million), the Larnaca - Dhekelia coastal road improvement (€17 million), the Larnaca - Dhekelia coastal road improvement Phase C (€17 million) and the Larnaca - Dhekelia coastal road improvement (€17 million). ) and the improvement of the Sotiras-Derynia road (€15.6 million), the Yermasogeia - Akruda - Diironas - Arakapa road (Phase A) €8.2 million, and the Nicosia - Palahori highway (€71.4 million) to be signed soon. In 2023, €400m projects will be tendered according to the presentation. These are certainly not targeted at small contractors, however, they are considered to have a positive footprint on the construction sector.

[This article was first published in Kathimerini's 'Oikonomiki' paper edition and translated from its Greek original]

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