Cyprus: A good option for property investors

The race is on for investors to buy a home in Southern Cyprus ahead of an expected surge in foreign demand for property when the euro becomes the formal currency in January 2008.

Cyprus has long been popular with British buyers - there are 60,000 Britons in the population of around 800,000. English is widely understood, it is an ex-colony, there is a tradition of retiring there, and many British estate agents operate on the island.

But EU membership since 2004 has led to investment and new immigrant populations from eastern Europe. With the introduction of the euro, the island is set to get much more popular with other nationalities, too.

There is widespread development on the island, and few places outside the central Troodos Mountains are genuinely remote or even very quiet, but there are four key areas for second-home buyers and hard-nosed investors alike.

Firstly Paphos, centred around a pretty harbour but now the most densely populated and built-up tourist region; then the cruise-ship port of Limassol, which offers high-spec apartments in town and fincas in nearby villages; thirdly Protaras on the east coast, where properties near the beaches predominate; and finally Ayia Napa - once a pretty harbour but now a magnet for clubbers.

Many developers and estate agents talk of 30-40 per cent price rises since EU membership started, and in some areas this is undoubtedly true. However, there have also been reports of an over-supply of new homes in some locations making it hard for sellers of older homes.

"There are too many new-build properties on the market, so prices are sliding. Many local agents will not deal with resale homes as they get a higher commission from developers selling new ones," says Judi Williams of estate agency Property Frontiers.

Select resorts at the top of the market have avoided this problem, mainly because of their scarcity. Aphrodite Hills, for example, is a 578-acre scheme of 650 large properties due for completion next year.

Near Paphos airport and served by an adjoining InterContinental hotel, it is the only spa and sports resort on the island. In 2000, off-plan town houses were selling for £95,000, but similar units are now on the market for over £225,000.

Analysts predict that better air access to Cyprus may mop up surplus supply at the more modest end of the market, too.

Research by property consultancy Savills and holiday-rentals.co.uk have highlighted homes in Cyprus as being amongst the main beneficiaries of price increases because of budget airlines. In some cases, properties are 40 per cent higher than comparable ones in areas not served by budget airlines.

However, the continuing discussions over Turkey's membership of the EU means Turkish-controlled northern Cyprus is less attractive for investment.

The buying process in the south is straightforward but differs from most holiday home havens.

Cypriot banks lend 60-80 per cent of the value of a property but do so on short seven- to 10-year terms, and usually on a repayment-only basis. Buyers also have to pay a real-estate transfer tax of up to 8 per cent of a property's value, plus, in some cases, stamp duty and annual local authority taxes.

As long as you spend more than 182 days a year in the country, you only pay 5 per cent income tax, and a double tax treaty with the UK means pensions are not taxed. Capital gains tax onprofits from the sale of a property is just 20 per cent.