DESPITE the expected stabilisation and minor recovery of the
economy, the increase in the gap between rich and poor and the downturn in the
real estate market are likely to continue, according to the latest Cyprus
Economy and Real Estate Forecast conducted by Leaf Research.
With regard to real estate, an increase in supply of grade B
office space and resales of holiday homes, combined with decreased demand, are
likely to subdue any forthcoming price recovery, according to the report.
“It is estimated that in the near term, real estate prices,
especially that of land, will decrease further as no substantial uplift in the
price of the end product is expected, the rate of sale is likely to remain
slow, and no debt-finance will be available,” it added.
In the short term, the biggest challenge would be the
prospect of development within the British Bases, as this would significantly
increase the supply of available land in Larnaca and Limassol.
In 2013, the highest movement in total volume (31 per cent)
and purchases by foreigners (38 per cent) were recorded in Paphos district,
while 27 per cent of sale and purchase agreements across Cyprus involved
The smallest number of sale and purchase agreements (241)
was recorded in the Famagusta district (six per cent of the total), while the
lowest percentage of transactions to foreigners was recorded in Nicosia (13 per
cent of total transactions, or 92 properties).
Prices decreased across all cities and for all types of real
estate. The largest decrease was recorded for shops (42 per cent decrease in
relation to 2009 Q4) and the lowest for houses (26 per cent decrease).
The largest overall price decreases were recorded in
Nicosia, since the capital was the last city to be affected by the crisis and
its economy is largely reliant on the public and banking sectors, the report
“The decrease in transaction volume and the drop in property
prices does not present an accurate picture of the property market. There is a
dearth of demand for land purchases (especially fields) and for constructions
in secondary locations,” said the report.
“In multiple cases, especially for “mass production” real
estate, even though prices are below construction costs, there is no demand.
Prime real estate attracts limited demand, but at distressed prices and usually
in conjunction with payments involving ‘blocked’ deposits”.
Leaf says that prices are most likely to continue decreasing
in the short term due to subdued demand but demand remains low mainly because
unemployment remains high and is expected to increase further in 2014.
“Nevertheless, positive prospects for the Cyprus economy and
real estate market are starting to become visible as the worst part appears to
be past us and we have entered a period of tentative stabilisation,” said the
The research suggests that in the medium term, the economy
would face the ongoing challenge of the banks’ deleveraging and foreclosure of
real estate assets, while in the long term there would be multiple policy
issues relating to the “reckless incentives provided to boost construction by
granting additional building density for various developments which has created
‘pent up’ oversupply”.
However, it said the forecasted economic stabilisation and
GDP growth onwards from 2015 were unlikely to be enough to alter the general
situation in the economy and the labour market any time soon.
And, even though there was an increase in income from
tourism (+8 per cent in 2013), hotel owners were in a difficult position due to
their levels of indebtedness, and have not invested in their hotels, lowering
the standard of the product.
The research said the percentage of non-performing loans
(NPLs) appeared to be stabilising, but remains at high levels which suggests
there was likely to be a need for further recapitalisation of the banks in the
In 2013 there was an annual decrease of 7.1 per cent in the
total loans to households, with most household loans being housing loans
(€11.8b) equalling 53 per cent of total loans outstanding. Total NPLs amounted
to €24.1b, which equals 147 per cent of estimated 2013 GDP.
The majority of NPLs are recorded in the construction
sector, amounting to €4.62b. As at year end, NPLs equalled 53 per cent for Bank
of Cyprus and 47 per cent for Hellenic Bank. For the co-ops, as at 2013 Q3,
NPLs equalled 47 per cent of their portfolio.