Is the Cyprus property market a bubble? / news about Cyprus property

Is the Cyprus property market a bubble?

ONE hears about property bubbles worldwide. We have a warning from Mr Greenspan of US, while The Economist has admitted that its predictions of a ?burst of the bubble? did not materialise but will do so in eighteen months. The governor of the Cyprus Central Bank warned about a Cyprus bubble eighteen months ago only to now explain that he meant that he was not referring to a Cyprus bubble but to a ?warning to buyers to be careful?.

To examine whether the Cyprus market is a bubble or not, we must first establish what a bubble is. The international term of a bubble is a reduction in values by 30 per cent. To see if the Cyprus market is a bubble, we must first analyze it.

We see that out of the total amount of purchases in real estate in Cyprus, 65 per cent of the local market refers to housing, out of which 90 per cent refers to own occupancy and 10 per cent for rental income/investment (this investment percentage tends to increase towards 15 per cent these days)

15 per cent of the market refers to commercial accommodation (shops/offices), 50 per cent of which are for own occupation and 50 per cent as an investment (for rental income).

Five per cent refers to industrial accommodation, with practically the whole lot refers to own accommodation.

15 per cent refers to holiday homes, 40 per cent of which is locally based and 60 per cent foreign demand.

What is the difference between the Cyprus Market and that of the more developed European/US property markets?

The foreign markets are more investment based, i.e. bought for income and resale. The foreign markets have large investment funds, provident funds and investment property companies, whose business is to buy and sell real estate for a profit (to an extent similar to Cyprus, but with regard to fields mainly and building plots, with the intention to sell over a mid-long term i.e. 7-15 years).

Foreign property owners are not attached to their real estate and, in the UK a home owner changes an average of three to four houses during a lifetime. In Cyprus it is rarely more than one time.

Therefore in foreign markets, large companies selling thousands of properties at any given time alter their property market drastically. This does not happen here, where the vast majority of property is owned by thousands of people. As such, if a foreign property investment company finds a more profitable investment e.g. in shares as opposed to real estate, there is a quick and constant conversion. In addition to this, buying/selling real estate in Cyprus is expensive in terms of transfer fees, capital gains, commissions, advertising etc. As such buying and selling expenses restrict the quick turnover that other countries have.

Property prices have jumped by a considerable margin in Cyprus, but similar property value increases have been experienced in the UK, Spain, Portugal and even in more ?recent? entries to the free real estate market, such as Romania, Croatia, Turkey, Bulgaria, Greece etc. So Cyprus is not a phenomenon to be looked upon in isolation, but more as part of a wider phenomenon.

To examine the increasing values in the Cyprus property market, we must first examine the reasons for such an increase and whether these reasons will alter positively or negatively, causing an analogous effect in the Cyprus property market.

The very recent introduction of long term financing facilities with 15-20 per cent own contribution and up to 30 years repayment has caused lower income groups to come into the market, increasing thus demand by three to four times. These easy terms, will they change in the near future? I doubt it, since banks/financial institutions are loaded with deposits, but with very limited secured loan applications.

The CSE situation has diverted investors to the real estate market, which is more secure. Will the CSE revive in the near future? I doubt it, despite the recent 35 per cent overall appreciation in certain shares. The same players of the CSE are around and attitudes will not change easily. As such and unless there is an increase from the CSE index of 90 to 500 units I doubt that this will affect real estate investment/prices.

The returns in real estate, in terms of capital appreciation are now in the region of 5 to 7 per cent p.a. with an added rental income of +-5 per cent p.a., making a total ?income? of say 10 per cent p.a. This is not excessive, but it is a good return by local standards, always relating to the risk involved.

The low interest deposit rates have directed depositors for cash, towards the property market. Will the interest rates increase? I doubt it, bearing in mind the EMU road of the Cyprus Economy. It is more than likely that interest rates will be reduced further, making real estate more attractive than before.

Young people have come into the market, preferring not to live with their parents are looking to buy/rent small units. I doubt if this will change since this is an increasing trend.

The black money (now washed) of the ?2 bil., have not as yet surfaced in the Cyprus property market to a large extent. It is slowly surfacing however, adding more pressure on property prices ? both in terms of land and rental income investments.

Will foreign investment for holiday home/investment decrease? I doubt it, bearing in mind the various infrastructural projects under development, such as the two new airports, 11 new golf courses, marinas, possibly the awaited casino etc.

Is everything fine with the Cyprus property market? No

As easy it is to buy, it is very difficult to sell. Sales cost could amount to seven per cent (commission, advertising etc) plus capital gains etc.

Office prices have been reduced (other than Limassol) and shop values have reduced by approximately 20 per cent of their pre 2001 level.

Shops? goodwill payments (key-money) has been reduced to approximately 20-30 per cent.

The new town planning zones (2003) have reduced to practically zero the development potentialities of added agricultural land, reducing, thus, added development land supply.

The VAT of 15 per cent on new projects will increase cost considerably, as I expect that oil prices will increase building cost. This will reduce demand.

Land purchases will bear a 15 per cent VAT after 2007 causing more difficulty in purchases, increasing further development costs/sales prices.

A possible tax on ?idle? (undeveloped building land) will place a limitation on speculative owners. This measure is quite possible to be implemented soon. If it does it will reduce demand/pressure on land price increases.

Foreign purchases are now having a better deal offered and at a much lower cost, for other countries (Bulgaria etc) increasing competition for the traditionally investment Mediterranean countries.

The Turkish occupied north has shown its teeth and its competitive edge will continue affecting the free areas

As a result of these and other factors, it will become increasingly costly and difficult for locals and foreigners to buy, reducing demand and as such prices, will, at least keep, steady. This will result in the increase demand for second hand accommodation, which, is now priced at a level of 30 per cent lower than its new counterparts.

Having then analyzed the market, do I suggest to you to invest in real estate? Yes, but with care. Do not get carried away and I suggest you restrict your investments for quality investments. Do not seek ?opportunities of low cost? because they could become problematic in the future. Is, however, the Cyprus property market, a bubble which will burst? Possibly if:

Interest rates jump from 4? per cent to 8 per cent

The CSE will increase to 500 units (now 90)

There will be a political upheaval? ? Up to you

The tourist trade will collapse? ? Up to you

I am here only to analyze the market and put to you the questions for each one of you to consider. At the end, as my father says, real estate is something that you can see, touch, walk on, take photographs of and sometimes speak to (with no arguments back).

Is there such an investment with the same characteristics?