Hike in Cyprus Construction Costs Threaten Recovery

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Real estate and construction stakeholders want the government to soften the blow delivered by an “abnormal” increase in construction costs, warning that development could screech to a halt.

A leading developers’ lobby group has warned the government that many projects will be put on ice if action is not taken, halting the country’s recovery following the coronavirus outbreak.

In comments to the Financial Mirror, Secretary of the Federation of Cyprus Building Contractors Associations (OSEOK) Yiannos Poumbouris said there is concern over rising costs of construction, as they argue it will not come down any time soon.

OSEOK believes the construction industry is at a tipping point despite its signs of resilience, as they cannot absorb the shock delivered by the price increase in building materials.

“Building in today’s conditions is at least 20% more expensive after the recent hike in diesel prices, and an increase in the cost of transportation of raw materials caused a domino effect on every material used in the construction sector,” said Poumbouris.

He recalled that crude oil prices have shot up around 80% since October 2020, while the cost of bringing a container has closed in on €18,000.

“What this all means for Cyprus is that the sector will take another blow, with a number of projects in the pipeline being put on hold, while buying real estate will become even more inaccessible for some people.

“When it comes to ongoing projects, contractors will be faced with a serious problem as the majority of units have already been sold. As a result, contractors will have to shoulder the increased cost.”

He said the same should not apply for projects awarded by the state.

“Developers undertook these projects under very different circumstances and had no way of predicting that prices would follow such abnormal growth.

“The state should take action by either extending the deadlines for projects without penalties or finding a way to compensate contractors for the increases.

“Unfortunately, the government does not seem willing to help out contractors by allowing extensions to projects”.

Poumbouris said the government could alter VAT regulations, allowing contractors and developers not to pay tax on building materials immediately but to roll over the VAT to the final consumer.

“At the end of the day, the state will not be losing out, as the VAT would be returned to us after the sale. This is a necessary step to boost liquidity in the market.”

State subsidies

The Technical Chamber of Cyprus (ETEK)––an advisory body — calls on authorities to step in as the increase in construction costs will bring about more inequality.

“Buying a property will become inaccessible for some people, especially young couples looking to buy their first home,” said the chair of the chamber Constantinos Constanti.

ETEK is putting forward a 10-point proposal to the government, which they will discuss with Transport Minister Yiannis Karousos and Finance Minister Constantinos Petrides next week.

Constanti argued the government should take initiatives to compensate for the market imbalance.

“The state should extend interest rate subsidies for the acquisition of a primary home, ending at the end of 2022.

“Furthermore, the government should reintroduce grants for couples wanting to buy a home in the rural areas.”

He also argued the state should expedite approvals of the incentive scheme introduced for people who want to upgrade the energy efficiency of their homes and businesses.

Constanti said the government should also be looking into helping out lower-income families who had to abandon building a home because of the pandemic and costly building materials.

“The state should take the initiative and inform the banks of these cases and instruct them to be more lenient when it comes to issues like credit extension or handing out a larger amount of money than what was initially estimated with more favourable terms.”

There are fears that a construction slowdown will have a knock-on effect in other areas of the economy.

He added that developers should also be supported by early VAT returns and not pay VAT on raw building materials they import.

“This measure should be extended to all construction projects, and not just for the construction of a primary residence.

“The government should also be considering other targeted tax relief measures for developers.

“Developers are hesitant to launch projects for which they have already received licenses.

“If no initiatives are taken or relief measures, the situation is expected to worsen in the coming months, with social implications and an impact on economic activity and employment.”

Source: Financial Mirror