The Republic of Cyprus is the third largest island in the Mediterranean, a member of the European Union (EU) since 2004 and the EMU since 2008; with a per capita GDP well above the EU average and the lowest corporate tax (10%) within the EU. The discovery of oil and natural gas between Cyprus and Egypt and Cyprus and Lebanon in the seabed areas is likely to give further boost to the Cyprus economy which already enjoys strong tourism, education, health and construction industries. As such, Cyprus real estate is likely to see better times despite the poor performance of the past two years.
Economic conditions have started to stabilize after the economic downturn, and the Cypriot economy is poised to return to modest growth in 2011. However, global financial risks remain elevated and growth prospects in main trading partners remain muted, which weigh on the outlook for Cyprus. Meanwhile, pressures in Euro area sovereign debt markets have intensified, and countries across the Euro area are responding by undertaking ambitious fiscal consolidation efforts. Cyprus also should act forcefully and with a greater sense of urgency to reverse its high fiscal deficits, in order to safeguard the sustainability of public financing and increase the scope for private sector growth. The banking sector remains sound overall, although the growth in non-performing loans calls for vigilance. Turning to medium-term prospects, containing the growth of public spending and enhancing wage flexibility are needed to boost productivity and improve growth.
The construction and real estate industry is a key driver and indicator of economic activity. In recent years, Cyprus has experienced a remarkable rise in property prices followed by intensive construction activity, especially in the residential property sector. The rising construction and real estate sector boosted by demand from the international community has contributed to the country’s economic growth significantly.
Cyprus enjoyed a more than ten-year housing boom until 2008. Then the market began to fall in certain areas, mainly because of,
(a) the fall in the value of Sterling against the Euro over the past two years means that British buyers, who accounted for more than 50% of foreign buyers, have less equity at their disposal. At the beginning of 2007 a pound Sterling would buy €1.47; today it will buy around €1.20, making investments in the Eurozone that much more expensive;
(b) the worldwide economic turmoilhas also changed the characteristics of the “typical” overseas property buyer. Investors are now being much more cautious about their investment decisions;
(c) the property related laws need to become more transparent, although the Cyprus government seems to be making concrete attempts to rectify the situation;
(d) mortgage interest rates in Cyprus are amongst the highest in Europe.
Residential property prices in Paphos have fallen by as much as 20% and 30% in the past three years. Areas that rely mostly on local buyers, such is Nicosia, have dropped only 4% to 6%, with prices in Limassol, Famagusta and west of Larnaca recording smaller drops. It is fair to state that Cyprus real estate and construction industries compared to the other EU ones and the US (US dropped 40%, UK 35%, Greece 40%, Spain tourist areas 40%), are doing a lot better.
The Department of Lands and Surveys registered an average increase this year of 20% in real property sales volumes bought by Cypriots; a welcome change from 2009´s rather depressing figures which saw, a 16.7% drop tourist revenue, a 2% rise in unemployment, a 16.9% drop in the number of building permits issued, and a 1.7% drop in GDP.
As per the Cyprus Statistical Service (CYSTAT) the number of building permits authorized by the Municipal Authorities and the District Administration Offices during July 2010 was 763, comprising:
* Residential buildings – 546 permits
* Non-residential buildings – 115 permits
* Civil engineering projects – 33 permits
* Road construction – 7 permits
* Division of plots of land – 62 permits
The 546 permits issued for the construction of residential buildings, these were approved for 1,028 dwelling units – 454 single houses and 574 multiple housing units such as apartments and other residential complexes. Compared to the July 2009 total of 1,161 dwelling units, this represents a drop of 11.5%.
Between January and July 2010 building permits were issued for the construction of 6,492 residential properties. Compared to the same period last year, when permits were issued for the construction of 7,110 residential units; a drop of 8.7%. The weak recovery in Cyprus’ overseas property market, i.e. real property sales to foreigners, continued during September with sales during the first nine months of the year up by nearly 3 percent on the numbers sold during the first nine months of 2009.
According to figures released by the Department of Lands and Surveys, a total of 180 contracts of sale in favor of overseas buyers were deposited at Land Registries throughout Cyprus in September compared to the 173 deposited in September 2009, a marginal increase. Although the market is showing signs of a weak recovery, the number of properties sold to foreign buyers during the first nine months of this year (1,402) is still down by more than 75% on the number sold during the same period in 2008 (5,622). So far this year, Nicosia has performed particularly well with sales up by 50.5% followed by Famagusta, where sales have gone up by 7.4% – and finally Limassol, where sales have increased by 3.2%. However, sales in Paphos and Larnaca are down by 6.8% and 12.4% respectively compared to last year.
As per the Department of Lands and Surveys, the number of properties sold to locals is declining in the second half of the year. Cyprus real property sales to locals in the first half of the year had increased by 26.8% compared to last year and there is considerable optimism about its future. However, for the third consecutive month, sales to locals have declined in spite of falling prices, other sales incentives and distressed sales. This decline has more than halved the overall increase this year, which by the end of September had fallen to 11.4%.
Opinion: Presently the real estate and construction industries are characterized by weaker demand compared to 2008. It is Pytheas’ opinion, however, that despite the current real property and construction industries contraction, Cyprus remains one of the most popular destinations for Europeans and other nationals that seek to invest in a holiday, a retirement or an investment home.
In terms of risk, Cyprus is at the lower end of the spectrum, largely based on low reliance on exports, prudent fiscal policies and performance, resilient financial sector, prompt fiscal policy response to the recent global financial crisis and limited exposure to subprime mortgages.
In terms of real property product attraction, the financial and other benefits are comparatively to other EU countries immense, i.e. some of the best tax breaks in the EU (if not the best), lower cost of living compared to mainland Europe, excellent weather, rich heritage and culture, superb medical facilities and infrastructure.
Additionally, the discovery of oil and natural gas in the island’s seabed areas is likely to give further boost to the Cyprus economy. As such, Cyprus real estate and construction industries are likely to boom once more despite the poorer performance of the past two years.
More decisive steps, however, need to be taken by the government to eliminate delays related to the issuance of title deeds. Moreover, due to the sizeable exposure of Cypriot banks to the ailing Greek economy caution should be exercised; note that the real estate market is a significant component of the banks’ loan books and represents the majority of loan collaterals (more than 40%): the low overall profitability contribution to Cypriot banks from Greece and the elevated loan provisions that subsequently need to be undertaken will affect the funding ability of banks to real estate related clients for at least the next 12 months.
Most importantly, where some other countries have lowered their mortgage interest rates and property taxesto encourage overseas investors, mortgage interest rates in Cyprus are amongst the highest in Europe and the government is talking about increasing property taxes it charges large land owners; a charge that will no doubt be passed on to those buying property. This approach is a recipe for disaster, especially when competition (governments in other countries) has taken steps to reduce the costs associated with property ownership to encourage investment!
A major factor in turning the amazing potential that the island has into achievement in the overseas property market is the ability of the Cyprus Government to develop, introduce and enforce effective legislation to deal with the many problems in the country’s real estate, banking and legal sectors.