In the decade between 1980 and 1990 Cyprus experienced high economic growth on the back of the reduction of the political risk, higher tourist arrivals, construction of several infrastructure works and increase in housing needs. The property market witnessed increase in the volume of transactions and a price boom. We estimate the average land annual price inflation to have been between 7%-10% during this period.
During the period 1990 to 1995, activity eased and prices showed a lower rate of growth compared to the previous decade. The main reason for the dip in the rate of increase was the Gulf War as well as the slowdown of the economy. We estimate the average land annual price inflation in this period to have been between 5%-7%.
The political instability of the period 1996 to 1998 caused by the Dherinia incidents and the rumors regarding the deployment of the S-300 missiles, depressed the property market over this period. The number of transactions was considerably lower and the level of nominal prices static but falling in real terms.
The focus of investment activity until 1998 was on land plots. Investment in houses and flats was minimal, since the erosion in their value was directly proportional to the depreciation rate.
In the second half of 1999 and during 2000 the property market was positively influenced by the upsurge in the values of the securities traded in the Cyprus Stock Exchange (CSE). Institutional investors, property developers, hotel companies and retailers acquired large parcels of land close to the beach, at prime residential and commercial locations from the accumulated cash from the listing of their stocks on the CSE. We estimate that prime location land had a 12%-15% increase over this period.
After the liberalization of the interest rates in 2001, the Central Bank of Cyprus has proceeded in consecutive rate cuts from 7.5% in 2001 to 5.5% in 2003. The cut in conjunction with the lucrative loan packages, with extended mortgage repayment periods, offered by commercial banks caused a lift in demand for all types of residential properties both by local and international buyers.
Further to the fall in interest rates, another major factor which contributed to this increase, has been the changing lifestyle of the Cypriot population i.e. students and young couples prefer to live on their own rather than with their parents. Also, the competitiveness in the job market and the improvement of the country’s educational institutions caused a rise in the number of local and foreign students.
House prices experienced rapid growth over the period 2000-2003 at an average of 20-25% pa. The main drivers of the increase are the surge of investment activity, the cut in interest rates, the entry of the island in the EU, the increase in the house prices in Europe and the reduction in the political risk from the negotiations for the settlement of the Cyprus problem.
Demand increased from local first time buyers as well as from international buyers mainly driven by the liberalization of the banking sector and the favorable mortgage terms offered to local buyers and for the first time to foreign buyers as well.
In 2004 the average house price growth rates slowed down at an average of 10% pa. The slowdown was the expected consequence of the strong increases of the previous years, which made some of the houses unaffordable for the average buyer.
Moreover the growing competition from cheaper, emerging second home markets, such as Bulgaria, Turkey and Croatia shifted some of the international interest away from Cyprus.
A huge growth in the property sector from 2005 up to the first half of 2008 was the result of the banking policy on the island and the reasonable property prices. Low costs and flexible mortgages offered easy access to the property market from lower income groups and expatriates. A contribution of up to 20% and repayment terms up to 30 years seemed very attractive (also counting the capital growth of the properties over the last years) and the demand was very high, causing proportionately high prices. Vacant land in urban centers showed remarkable increase up to 70% during these years
The global crisis has started to affect Cyprus in the middle of 2008. After some years of credit-financed overheating, the Central Bank imported hard measurements in order to decrease the exposure to overvalued properties. For a six month period, major banks for the Cypriot economy such as Bank of Cyprus and Marfin Popular Bank almost declined to mortgage any property. The new financial terms determine a LTV ratio of about 50% to 60% which is prohibitive in many cases and resulted in expatriates choosing other cheaper destinations and indigenous population postponing any property buy or rental.
Cyprus’ links with its key economic partners (Greece, the U.K. and Russia) resulted to a sharp slowdown in the economy since 2009. The financial crisis in Greece and the exposure of Cypriot banks there, as well as the financial uncertainty in the other two countries are considered as negative parameters in the local economy.
Despite the fact that the national GDP growth was positive for the years 2010 and 2011, the contamination of the Cypriot banking system from the Greek sovereign debt crisis has forced the country to request an EU/IMF bailout. Therefore, the likelihood for recession in 2012 is strong and will most likely have a further negative impact in the real estate sector activity.
Already the construction sector indicators have been weakening over the past three years:
- Construction sector employment has dropped from 11% of the total employment in 2008 to 9% in 2011.
- Spending in construction has decreased by 33% between 2008 and 2011
- The share of construction output over the total economic output has decreased from 11% to 7% over the same period.
According to a recent survey conducted by KPMG, Cyprus is one of the most attractive offshore tax havens in Europe. Together with Ireland and Switzerland, Cyprus enjoys relative transparency in its tax structures, suffers lower levels of taxation change and upset annually compared to other European countries, and has the highest percentage of local citizens happy with the level of tax legislation in place according to the survey.
With one of the lowest corporate tax rates in the European Union, Cyprus is now an important springboard for investments into Russia. Some 20.5 percent of the $262.6 billion invested there since the collapse of the Soviet Union has been via Cyprus. Thousands of offshore companies registered on the island are Russian, which re-invest profits back into Russia. The island, with a population of less than 1 million, has about 60,000 Russian speakers.
This business link between the two countries has had a positive impact on the property market, as Cyprus has become a popular holiday destination amongst Russians as well as an attractive property investment destination for many Russian buyers.
Cyprus in international context
Fears of prolonged house price decline continue to decrease buyers’ confidence in today’s holiday home market. Based on our experience from the UK buyer market take-up in second homes abroad in 2011 has dropped below the pre-2000 level. A number of factors have contributed to the low level of purchases in the last year:
- Contraction of international travel and tourism industry which is a key driver of the holiday home sector
- Falling personal wealth levels
- Reduced financing availability. Easily accessible mortgages with increasingly high loan to value rates have supported the market in recent years. However, with tightened lending criteria and low buyer confidence, the European Mortgage Federation reported at the beginning of 2009 that continued declines in new mortgage lending brought values to early 2000s levels.
- Unfavorable exchange rates for UK buyers in the Eurozone have also impacted purchasing activity. For Britons, the depreciation of the pound has made properties up to a third more expensive.
- Declining house prices (see Figure 4) have also contributed to the slowdown: Not only in terms of confidence - buyers do not want to see their purchase immediately depreciate in value - but also impacting those who would normally re-mortgage their primary home in order to finance overseas purchases.
Also contributing to the low sales level are the vendors who are not under pressure to sell their properties and who are reluctant to sell at reduced values. They are therefore choosing to wait until market conditions recover before committing to a sale. These factors have led to the reduction in transactions since mid 2007. As such, ownership levels have remained relatively static in the last year, with almost 470,000 UK households in possession of overseas properties.
Overall fears of continued price decline mean overseas buyers are sticking to safe markets. When we compare sales data in the period 2000-2008 and 2009-2011, overall investment in overseas property has decreased but sales data show that France has maintained its popularity for buyers. In contrast the proportion of purchases in Spain has reduced considerably due to negative news regarding the economy and the property market. On the other hand the perception that the market has bottomed out and offers bargains has driven the purchasing activity in some US locations such as Florida. This signifies that investors are keen to acquire properties before prices rise again. Cyprus share of sales has also dropped, but the market appears to remain on buyers’ radar.
Buyers continue to show preference to low density environments and good accessibility proximity to beaches, and the opportunity to sample local cuisine and culture. Our survey of 1,700 UK holiday home owners shows that almost 60% of holiday home owners prefer quiet rural and village environments to urban areas (22%). 19% of holiday home owners have invested in properties in purpose-built master-planned resort communities, which have risen in popularity in recent years. These typically comprise hotels, holiday homes, sports and recreational facilities and benefit from onsite property management companies.
With 78% of respondents choosing to fly to their overseas property, airport access is an important factor for many holiday home buyers.
Holiday home buyers have traditionally preferred spacious detached properties, but rising prices led to growth in apartment purchases in recent years. Buyers tend to favour properties with modern interiors and multiple bathrooms showing they seek at least the same level of comfort in their second home as in their primary residence.
By 2008, more than 60% of the market was choosing to buy clustered property types such as apartments and townhouses. However, the advent of the credit crisis saw a reversal of this trend, with detached houses the single most popular property type in the 2009-2011 period. This renewed preference for larger, detached properties underlines the lifestyle driven nature of the current market. The results of our survey show that in Cyprus buyers show a preference to apartments, but this is the result of large amounts of new holiday apartment development in recent years.
Lettability of holiday homes is one of the key long term objectives of holiday homes owners. Additionally, almost a third of the respondents who own a holiday home in Cyprus expect to eventually retire there. Historical ties, warm climate and good tourism infrastructure are big attractions here.
Cyprus is an independent, sovereign Republic with a presidential system of government. Under the 1960 Constitution the executive power is ensured by the president of the Republic, elected by universal suffrage for a five-year term. The president ensures executive power through a Council of ministers, appointed by him. The Ministers may be chosen from outside of the House of the Representatives. Each Minister is the Head of the relevant Ministry and exercises executive power on all the subjects falling