On Saturday 1st December 2008, Mr. Antonis Loizou gave a lecture in Ayia Napa on behalf of the UK Alzheimer’s Society, which was attended by 120 residents of Cyprus, mostly foreigners. The topic was the Real Estate Market in Cyprus. We provide an abridged version of the speech.
Investing in real estate, whether it be a house, land, income-producing property, or development, has so far been a “safe” investment in terms of security of principal. Since 1974, prices have been moving up at variable rates per year. Until 2001, prices rose on average 7% – 10% per year, but since the crash of the Cyprus stock market, the interest of investors turned to real estate. The inclusion of Cyprus in the E.Union, together with the more favorable tax system in the EU and the double taxation treaty between Russia and Cyprus, has caused Cyprus to attract a growing influx of European and Russian interest, which has helped real estate investment in Cyprus. .
The lifting of restrictions regarding the purchase of property by EU companies and citizens has broadened the scope of real estate investment and now, foreign buyers in real estate in Cyprus are estimated to contribute around CP700k. This is just below the largest earner of foreign exchange, the Tourism Industry and its bill of CP1,200. pa and well ahead of the third largest source of foreign exchange, ie the contribution of offshore companies of about CP350 thousand. No
This great foreign demand, together with local interest, as well as the additional taxation on real estate, such as VAT of 15%, has caused prices to move at a rate between 2002 and 2004 of around 15% per year, while the very Prices of recent years have shot up almost 20% annually.
This is particularly true of parcels and building land and, more recently, agricultural land. With development land prices so expensive and planning laws allowing single-house development almost everywhere, public interest has shifted in increasing volume to agricultural land, where prices have shown increases of over 30% – 50% in the last year alone.
This situation of high cost of land development, now becomes about 40% of the total development cost of any house/apartment, while a couple of years ago, the cost of land in the sale price of a building amounted to 20% – 22% only. This unhealthy state of affairs will be aggravated by the introduction of VAT on building land from August 1, 2008.
So when will it end, and more importantly, are we headed for a real estate crash? I doubt it. Since these substantial increases in property prices have so far been absorbed by the public, it has affected the rate of sale mainly for the less competitive projects, making the market somewhat unpredictable and somewhat uncertain.
To this negative image it is also necessary to take into account that several positive/balancing measures are now in hand. The reduction of interest rates [as for 1.1.08 from 4.5% this rate it is reduced to 4.0%] and the longer repayment periods of the loans now offered have helped.
The new measures of the Central Bank in relation to the own contribution in the purchase or development of real estate that has increased the original contribution from 20% to 40% [for non own users – permanent residents] expected to affect ‘for rent’ market as returns/fields in Cyprus are very low [around 4% p.a.] and is one of the lowest among popular holiday home destinations in Europe, while the high cost of air tickets, etc. makes renting not as easy as in other countries [some balance may be gained when low cost air fair airlines are in full operation in Cyprus].
The new pending infrastructure measures such as the pending development of the two airports on the Island, the pending development of the 4 new marinas [expected to come around the year 2012] now on offer, as well as the expected 7 or 8 new golf courses, will add to the attraction of the island, making Cyprus perhaps the most densely populated area in Europe in terms of golf courses per population. On the other hand, if these projects materialize [i.e. golf/marina/Larnaca port projects] placed on the real estate market [mainly directed towards the foreign people] around 10,000 new homes in addition to the normal number now being produced [approx. 5.000 p.a.] With existing demand around this number [5.000 units] and even considering an increase in demand due to previous infrastructure properties, supply will exceed demand in 2010-2015 with possible negative effects on vacation home market prices.
Buying/building real estate/houses in Cyprus is easy as it is the most popular business. At this time, “Real Estate Development” is carried out by almost everyone, regardless of their qualifications, financial status, honesty, etc. For this reason, we notice an increasing percentage of delays in incomplete projects, projects without permission, etc. and as such, care is needed. For this reason, I have prepared for your consideration our signature “10 Building Commandments” that every potential real estate buyer should follow as closely as possible.
Buying in Cyprus is easy, but selling your property is another matter. One must compete with aggressive developers and well-connected, well-organized real estate agents. [some of which charge in excess of the legal 3% -5% – rates reaching upto 15%] so you should keep in mind not to be in a special hurry if you want to sell your property.
As I said before, real estate prices have recently risen at a rate of 20%. This is partly due to foreign interest representing approx. 20% of the total acquisition of real estate in Cyprus. This is a very high percentage, especially when concentrated in certain areas. Therefore, care must be taken, since if you choose to invest in such popular areas of concentration of foreign people, you run a higher risk of price adjustments up and down, since foreign people behave differently from foreigners. premises whose demand/supply is inelastic.
The following table is quite interesting as it illustrates the concentration of foreigners [on a % of the total demand of the area]
Pafos Limassol Larnaca Nicosia Famagusta
90% 40% 50% 5% 50%
What are we going to do with the Russians my dear friends? As this country becomes more stable and oil prices rise, middle/upper middle income Russians will become more financially capable and turn their attention to vacation home destinations. Average sales prices per m2. for this type of property that Europeans usually buy is in the region of CP1,500 – CP2,500 [max.] per m2, the Russian market with special interest in Limassol, has even shown prices of CP4,000 – CP6,000/m2. for beach drives.
With a mathematical calculation, the beach of Cyprus and even the locations near the beach will be acquired by the foreign market and this is something to be considered. The demand from foreign buyers affects the local population whose incomes are not competitive with the foreign market and are gradually being overtaken.
This will create various problems, entire areas/villages will be inhabited by foreign residents, on regular visits. [see Sotira area west of Ayia Napa] and even the entire takeover of small towns and dare I say towns [see Pafos in 10 years’ time]. Of course, I am not against the foreign market and I know that Cyprus cannot return to the restrictive system of real estate sales by foreigners, so it is more of a theoretical approach than another.
We live in a global economy and now, with the EU, traveling and settling abroad will become easier. Cyprus is in a lucky position regarding the weather, be it with little drinking water, but in closing, I will say yes, invest in real estate, but take care of yourselves and don’t go overboard financially. Do not rely on rental income to repay the loan, keeping in mind that you need about 10% of a residence’s 12-month income to cover repairs/void periods and administration, plus any tax implications, including your tax liability in the resale case.
However, for those who are permanent residents, my advice is to try to learn a few Greek words or, better yet, speak the local language. I know that trying to learn Greek is the hardest thing. [two types of languages, the written proper Greek and the local Cypriot speaking Greek – quite difficult]. If you manage to master some of the language, it will make your life much easier, although I am aware that even when you try to practice your Greek language skills, people will respond quickly to you in English.
If you manage to speak the language, I can assure you that your life here will be much easier/happier.