Cyprus, Buying Property – Contract Flipping

Rick Magliano

Contract Flipping is a situation where a person enters into a contract to purchase a new property off plan but only pays 30% as a deposit before he/she sells it on for a profit. Essentially the speculator is able to leverage the potential price increase in property over the one or two years it takes to complete the property.

In fast moving markets the opportunity for flipping is excellent but in stable or even falling price periods the speculator could get stuck having to come up with the remaining 70% and take ownership. And if he wants to sell he could take a loss on in the less popular re-sale markets.

The potential contract flipper must also make sure that he has excellent legal advice just like any other property purchaser – obvious really but many just think they are buying and selling contracts but if the ultimate buyer cannot get ownership then no sale will be made by the flipper.

When buying property abroad for contract flipping the same rules apply as when buying property back home -location, location, location – and value for money.

With VAT coming onto land sales in Cyprus in 2008 anyone who buys property now can look to a 7% margin built in and until the title deeds are transferred into the names of the buyer the land transfer tax at about 2% of the property value does not have to be paid out.

But the savvy flipper needs to look at for cancellation fees payable to the developer when he comes to sell, hopefully well before he has to shell out the 70%. Property developers do not usually mention contract cancellation fees on re-sale before title deeds are issued and if it is not mentioned tend to charge a fee of around 2% of the purchase price. So the savvy flipper caps this in the contract at CYP500 and makes sure that there is an explicit right to sell. Surprising this last point but it is sometimes forgotten.

In addition the savvy flipper will make sure that he doesn’t pay a share of the developer’s liability for Immovable Property Tax on his whole portfolio by making a provision in the contract too.

The savvy flipper can only use the personal CGT allowances in Cyprus once. So the contract flipper may need a corporate vehicle for his business. Yes, it is a business !!

Setting up a company in Cyprus through your lawyer in Cyprus will cost about CYP1500 but it can be very tax efficient from a CGT and company tax point of view.

If you are a multiple contract flipper then the savings could be significant. Cypriot companies attract a corporation income tax rate of 10% on rental income and a Capital Gains Tax of 10%.

Unlike personal taxation,you will not have any additional tax to pay in the UK unless you draw the income or capital gain from the Cypriot company. If you retire to Cyprus you can draw the money at personal Cypriot rates of tax and if you are an investor you can reinvest the profits into further real estate with no additional UK tax due.

The next big event in Cyprus is membership of the Euro-zone in May 2007 and the adoption of the Euro as the country’s
currency. Interest rates on euro borrowings could be in the region of only 2.5%. Generally speaking this is good for the contract flipper because as interest rates fall people can afford to borrow more money to buy property and more people can afford to enter the property market.Those buying off plan and flipping properties for resale as they come to completion are cashing in on this capital growth rate.

Following the successful ecu-peg policy, the Cyprus pound was pegged to the euro on 1 January 1999, the first day of the introduction of the new European currency. The central parity rate was maintained at CY£1 =EUR1,7086. Initially, the fluctuation margins were also maintained at ±2,25%.

However on 1 January 2001, however, wider bands of ±15% were introduced in order to enable the Central Bank to absorb any shocks from potential destabilising capital movements and to deter speculative capital flows, in the context of capital account liberalisation. At the same time, the narrower bands of ±2,25% were temporarily maintained in order to anchor prices and expectations.

By some quite crude maths that could be GBP/CYP at 0.75 at the bottom. Those paying for a property in stage payments might like to note the downside potential.

Sentiment is that it is still 50/50 on whether or not there will be a devaluation, but perhaps the best thing is to keep as little capital in CY£ as possible, just in case!

Given the above, what happens if you have a mortgage here in Cyprus in Cyprus Pounds and the Cyprus Government devalues and then goes into the euro?

It would mean that you could be a winner! It all depends on what the source of the money that you use for the mortgage repayments is. If the Cyprus Pound is devalued, it means that other currencies will buy more CYP than before, so if you are using a sterling UK income for repayment for instance, the amount of Sterling that you will need to change to make the same CYP payment will go down.

Put another way, if you have a mortgage in CYP that is equivalent to say GBP50,000 and the CYP devalues 10%, then you would only have to pay GBP45,000 to clear it.

If you have a CYP50,000 mortgage at the current exchange rate of CYP1 = EUR1.74333, then the euro equivalent of the loan right now is EUR87,166. If the CYP devalues against the Euro by 10% then the exchange rate would be CYP = EUR1.56899, which means that a CYP50,000 loan would then equal EUR78,449. A 105 reduction.

There is much in this article for the property contract flipper in Cyprus to think about as he thinks about how set his strategy for the next couple of years.

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