The Global Economy and The Cyprus Property Market

We are experiencing a unique and an unprecedented economic situation, which has so far affected most countries and at this point of time we do not have signs on whether the situation will improve or it will worsen. Living in a global economy, no country will be exempted, although it will depend on the extent of its negative effect from country to country.

Usually, Cyprus so far has been lucky enough to override economic and other crisis, based on the misfortunes of others. So the 1974 invasion was followed by an influx of the Lebanese as a result of their civil war, with millions of investments in Cyprus, the oil boom that followed in the 1980’s had again helped Cyprus due to the influx of millions of petrol dollars, including the creation of an Arab based demand for real estate, the Yugoslavia civil war has had a similar effect, whereas the Russia revolution of the Yeltsin era, has added to the island’s good future.

Now, I am afraid, the situation is quite different and more difficult. Cyprus has not, as yet felt the full affects of the situation, no one has lost his job and the only noticeable affects at this point of time in the drop of the stock exchange values. This globally uncertain situation however has caused demand especially from abroad to be reduced drastically. Cyprus real estate demand comprises of approximately 80% locals and 20% foreign. As such and bearing in mind the large percentage of the foreign market, the local market is affected positively or negatively depending on the economies of the countries whose nationals buy in Cyprus. Out of the total foreign demand, approximately 70% comes from Britain, 10% from Russia and the rest from other European countries. With the dependence of the market on the U.K. and with the prevailing state of the U.K. economy, it is evident that demand from this market source has been reduced considerably. So we notice that in those localities that the Brits are interested at (Paphos and Famagusta area primarily and to a lesser extent Larnaca and Limassol) there is a considerable drop of interest. For Paphos the reduction in demand and sales prices is around 25% for apartments and 20% for villas, whereas for the Famagusta area the reduction is 25% for apartments and 10% villas. For the Larnaca region the reduction is 10% across the board other than apartments at Oroklini -25%. Limassol has not experienced any noticeable reduction at this point to time, primarily because the Russian market is quite active there (approximately 80% of the Russian demand directs itself for this town and the rest 20% all over) and because Limassol is experiencing heavy infrastructure investment and development. The new seaside sports ground, the promenade works, the land reclamation, the old fishing port conversion, the new marina and the location of the new technical university, are all factors, which have helped the Limassol market. It is, of course, a matter of time. If the situation that exists at the moment continues for another 6-9 months, I would expect a direct price reduction for Paphos/Paralimni around 30% and for the Larnaca region 18%, whereas Limassol will also feel the pitch at around 10% in certain areas. Nicosia market, which is Cypriot demand based, is not expected to be affected more than 12%-15% (price reduction).

The Cyprus real estate market is more sensitive for the routine projects, which have no competitive edge against other market alternatives and for which there is ample supply. So routine flats in individual blocks or in projects with a common pool not in attractive localities, will be affected more than others. On the other hand beach property will sustain their market since the available supply is fast reducing and we are running out of beach!! Beach prices have shot from EUR8.500/sq.mts. to EUR15.000/sq.mts. within one year (we refer to beach villas of good quality in the Limassol area). Beach property at Larnaca and Protaras are expected to sustain their existing prices of around EUR6.000-EUR8.000/sq.mts. (beach villas).

What is more worrying is the number of resales (property bought and the buyers due to the situation back home sell them at discount prices) that it is fast increasing. Most resales are from the British market and it is not uncommon to offer their property with a discount of 20%-30% from their pre-crisis situation values. The large reduction is encouraged by the increase in value of Euro vis-à-vis the sterling, so the effective reduction may not be more than 10%-15%. Again referring to the British demand, the mainly British based cowboys-illegal estate agents, who charge 15% commission and who organize inspection trips etc, have passed on this high commission level to their buyers (through the developer). As such numerous people have bought property at inflated prices in excess of 10% and without having the right to choose. Perhaps we will have the time to exchange some information how this scam was planned and is organized and how some of these international crooked estate agency firms suddenly left the island with the downturn of the market, whereas other have gone into a voluntary liquidation (obviously so that no (one can chase them). So their clients are now left stranded in the desert during a period of no demand with nowhere to turn and with very little advice. Most of their staff has left and the bosses are nowhere to be found, whereas as the British legal system is at the moment, they bear no responsibility towards their clients.

A basic criterion in the worsening or not of this situation, is the strength and support of the local banks who are financing developers and buyers. It appears that local banks have a solid foundation and their loans are covered by a 20%-25% buyer’s contribution (in contrast to the 100%-110% loans in U.S.A. and some European countries). At the same time, locals, who are very much attached to their land/property, will most unlikely offer their property at substantially reduced prices. A Cypriot very rarely sells under pressure (they either withdraw their property from the market or you may even notice that some of them increase the prices), whereas local banks will not/cannot take speedy action on a mortgage foreclosure. So whereas in U.S. a mortgaged property can be sold within 3-5 months, in the U.K. 5-6 months, in Greece 9 months, in Cyprus the system is such that it will most likely take 6-9 years, whereas if it relates to the main residence, it will extend to 12-15 years (see Pieris example that it took 40 years). So, this inefficient system causes, in such occasions, luckily for Cyprus a technical reduction in the supply, which will help towards the minimization of property prices reduction.

The Cypriot economy depends basically on the tourist industry with a foreign currency of EUR2 bil. foreign exchange, the building industry with a EUR1.3 bil. foreign sales and the offshore Cos with a foreign income of around EUR600 mil. So if this situation continues and in addition to the real estate there is a sharp reduction in the nos and spending power of tourists, it will affect the economy substantially. If the reduction of the foreign demand reaches 50%, it will produce a loss of 10% of the total market and based on a prediction of a local demand drop of 20%, it may cause the reduction in the property prices of around 20%-30%. This refers basically to residential (routine projects) and residential land. It is worthy to note that the Office and Commercial market is quite active and especially in Nicosia and Limassol, demand is improving. Again it is a matter of timing and how the financial year 2009 will behave. Predictions are predictions and must be studied as such, since the situation is very flu and it changes from day to day. A careful watch must be directed towards the Russian market, which is quite active in Cyprus and which so far has not shown signs of a reduction. On the contrary with the state of the European Banks there in hope that Russia deposits in Cyprus will increase. On the other hand oil prices are going down and the Russian stock market is having a down turn and these signs must be monitored.

In concluding I would like to say that we do not expect that local property values will reach the U.K.’s price reduction of 25% (commercial properties) and the 15%-20% for residential, but some ill affects will certainly reach us. Again on a positive note local banks are not known for their aggressiveness so the pressure placed on the clients will not cause them necessarily to rush and sell.

A logical question is then shall I buy now or wait next year when prices will be reduced further? A difficult question to answer, since if on the one hand you find something you like now, but you give it a miss, because you expect the prices will drop further next year, the property might not be there by the time you decide. On the other hand if you are not particular, then perhaps, waiting for another 6 months may be a good move. In my estimation, based on international analyst economic expectations, that prices will reach the bottom by mid 2009 prior to the tourist season and from there on they will be on the path of improvement.

On a positive note we are all aware of the anxiety that people have for their bank deposits. If you are really worried that your money deposits will be gone and as an alternative of buying a safe and keep your money in house, buy property since at least it will not go anywhere and sometime in the future prices will recover. Real estate might drop in price, but then, as you know, the real estate market is a cycle, so at least you have a hope to reduce your loss in the future.