COVID-19 pandemic derails Cyprus' housing market recovery
Lalaine C. Delmendo | August 11, 2020
The economy is under significant strain. In Q1 2020, tourist arrivals and revenues plummeted by 46.5% y-o-y and 52.4%, respectively. The European Commission expects Cyprus' economy to contract by as much as 7.7% this year.
It is another major “hit” for Cyprus' economy, which had suffered two other big hits over the last 12 years:
- The 2008 global crisis. Cyprus' economy contracted about 2% in 2009, mainly due to the adverse impact of the global financial crisis. After registering anaemic growth rate of 0.4% in 2011, the economy shrank again by 3.4% in 2012.
- Cyprus' 2012 banking crisis. Due to the collapse of its entire offshore banking system, Cyprus' economy suffered a huge 6.6% contraction in 2013, and a 1.9% contraction in 2014, based on IMF figures.
The property market was also afflicted by the title deeds scam (see below) which caused thousands of foreign buyers to lose their investments.
Before Coronavirus hit, Cyprus' banking system had just about recovered. The economy was growing strongly. The property market was beginning to pick up. But then– wham! –along came Coronavirus, killing Cyprus' main industry, tourism.
During 2019, the nationwide residential property price index had risen by 2.16% (1.44% inflation-adjusted), following y-o-y increases of 2.51% in 2018 and 1.78% in 2017, according to the Central Bank of Cyprus – not enough to reverse the 30% house price decline 2009-2016 (32.3% inflation-adjusted) but still a recovery. The three years of house price rises were caused by Cyprus' steady economic recovery as it put its economic house in order, with GDP growth of 3.4% in 2015, 6.7% in 2016, 4.4% in 2017, 4.1% in 2018, and 3.2% last year.
By district, during 2019:
- Nicosia, Cyprus' capital, apartment prices rose by 1.5%, and house prices increased by 1.1% from a year earlier.
- In Limassol, apartment prices rose strongly by 7.6%, while house prices increased by 2.4%.
- In Larnaca, apartment and house prices rose by 7.4% and 0.9%, respectively.
- In Paphos, apartment prices rose by 1.6%, while house prices increased slightly by 0.7%.
- In Famagusta, apartment and house prices rose by 0.8% and 3.3%, respectively.
Both demand and supply of housing are now falling. Property sales fell by more than 41% y-o-y to 3,271 units during the first half of 2020. Domestic sales dropped 39% y-o-y while overseas buyers fell by 44%.
The Cyprus real estate market has historically been divided into the major urban centres of Nicosia, Limassol and Larnaca (primarily driven by local demand); and the seaside resort areas of Paphos and Famagusta, which are mostly driven by foreign demand. The economic decline of recent years affected both areas.
Foreigners can buy one home in Cyprus, and are entitled to hold land freehold, but there is a maximum limit on land ownership of 3 donums (4,014 sq. m.).
Rental returns in Cyprus are reasonable, while property is inexpensive
Property prices. Property is not expensive in Cyprus, with prices around €1,600-3,4000 per square metre (sq. m.). Smaller properties cost rather more per sq. m. than larger properties.
Property rents. Apartments of 120 sq. m. cost around €700-€800 per month to rent in Larnaca and Nicosia, and probably more in Limassol, though this year we were not able to find enough properties to bring you reliable figures.
If you are buying specifically with a view to renting out your property, very small apartments in Nicosia appear to give you higher yields.
Property returns. Cyprus has not traditionally been a great location to be a landlord, because of moderate rental returns. But while gross rental yields in Cyprus have remained steady over the years, they have fallen almost everywhere else as a result of the asset-inflationary effects of low interest rates. Result: Cyprus now looks comparatively attractive as a place where buying prices are low, so that capital gains on property are conceivable. However, it is always extremely hard to forecast which locations international buyers will seize upon as attractive.
Rental returns (yields) on property in Cyprus are around 4.7% to 5.6%.
Property buying costs. Round trip transaction costs on the purchase of old residential property in Cyprus are moderate, but VAT on new properties is high. See our Cyprus residential property Buying-Guide and Cyprus property transaction costs compared to the rest of Europe.
Buyers should beware serious problems with property titles in Cyprus, an issue still ongoing.
Rental income tax is low to moderate in Cyprus
Rental Income: Rental income exceeding €19,500 is taxed at progressive rates. Standard deductions for income-generating expenses are deductible from the gross income.
Capital Gains: Capital gains realized from the sale of immovable property are taxed at 20%, with a lifetime exemption of 85,430 if the property was owner-occupied for at least 5 years.
Inheritance: There are no inheritance taxes or estate duties in Cyprus.
Residents: Residents are taxed on their worldwide income at progressive rates, from 0% to 35%.
Total transaction costs can be high
Total roundtrip transaction costs range from 7.60% to 16% of the purchase price. The buyer pays around of 4.60% to 11%, whereas the seller pays 3% to 5% for the agent’s commission.
The transfer tax rate ranges from 3% to 8%, depending on the purchase price of the property. If the property is in joint names, the property value is halved, leading to lower transfer fees.
Cypriot laws are pro-tenant
Rent Control: The rental market can be divided into two broad categories: Houses controlled by the Rent Control Law (1983), and the free market.
Foreigners are not covered by the provisions of the Rent Control Law, except the non-Citizen wife of a citizen of the Republic, and legal entities controlled by non-residents.
Tenant Eviction: Eviction of tenants is relatively difficult, especially in the case of ‘statutory tenants’ protected by the Rent Control Law. It takes an average of 360 days to evict a tenant.
Cypriot economy continues to grow, but outlook is now gloomyIn Q1 2020, the economy expanded by 0.8% from a year earlier. “Cyprus was on a solid growth path before the global outbreak of COVID-19,” said the European Commission’s summer outlook. “…the pandemic, and the confinement measures that followed have dramatically changed the picture.”
Cyprus had real GDP growth of 3.2% last year, following annual expansions of 4.1% in 2018 and 4.4% in 2017, driven by strong domestic demand and favourable external demand for Cypriot exports
The economy is now under significant strain with tourism revenues expected to plunge to only about 25% of last year’s level. In Q1 2020, tourist arrivals and revenues fell by 46.5% y-o-y and 52.4%, respectively. Last year, tourism revenues generated from record arrivals of 3.97 million amounted to €2.68 billion (US$3.1 billion).
As such, the European Commission expects Cyprus’ economy to contract by as much as 7.7% this year, before bouncing back in 2021 with a 5.3% growth.
Cyprus is expected to record a substantial overall deficit this year, beyond the official estimate of 4% to 5% of GDP, after the government recently allocated over €1.2 billion (US$1.4 billion) for COVID-19 assistance to the health sector, households and businesses. This is in sharp contrast to a surplus equivalent to 1.7% of GDP in 2019.
Gross public debt is projected to surge above 120% of GDP this year, sharply up from 95.5% of GDP in 2019 and surpasses the previous high of 109.2% of GDP in 2014.
Consumer prices fell by 2% in June 2020 from a year earlier, the biggest decline in four years, following a 1.5% drop in the previous month. Inflation averaged 0.7% in the past three years.
Unemployment in Cyprus climbed to 10.2% in May 2020, up from 8.9% in April and 6.7% in March, according to Eurostat. In fact, it was the highest level in almost three years, amidst coronavirus related-lockdown measures. From an average of just 4.8% from 2000 to 2011, unemployment had surged to an average of 12.3% from 2012 to 2019, according to the IMF.