Land values could fall further, but prospects good in the very long term
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 further, according to the latest Cyprus Economy and Real Estate Forecast conducted by Leaf Research.
As regards 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. 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, the Leaf Research forecast said.
In the short term, the biggest challenge will be the prospect of developing within the British Bases, since this will significantly increase the supply of available land in Larnaca and Limassol. In the medium term, the economy will face the ongoing challenge of the banks’ deleveraging and foreclosure of real estate assets, while in the long term there will 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.
“It appears that transaction volume is at its lowest levels, whilst prices are most likely to continue decreasing in the short term due to subdued demand. Demand remains low mainly because unemployment remains at a high level and is expected to further increase in 2014. Nevertheless, positive prospects for the 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,” explained Pavlos Loizou, MRICS, managing partner of Leaf Research.
GDP AND UNEMPLOYMENT
With regards to gross domestic product (GDP) and unemployment, the forecasted economic stabilisation and GDP growth from 2015 onwards are unlikely to be enough to alter the general situation in the economy and the labour market any time soon. The decrease in GDP for 2013 was limited to 5.3%, which can be positively compared to the original forecast of a 8.7% decrease.
Revised forecasts indicate a minor decrease of GDP during 2014 and an increase of 1.1% in 2015.
At the same time the unemployment rate reached 17.5% in December 2013 and is expected to increase further this year, peaking north of 19.0%. The expected recovery from 2015 onwards is estimated at GPD growth of 1.0-1.5% annually, which is unlikely to decrease the unemployment level to below 10% any time before 2020.
Even though there was an increase in income from tourism (+8% in 2013), hotel owners are in a difficult position due to their levels of indebtedness. Furthermore, they have not invested in their hotels for a long time, which has resulted in their product offering being somewhat inferior when compared to other markets.
Despite a 2.4% decrease in tourist arrivals in 2013, there has been a notable increase of 8% in the income received from tourism compared to the previous year. Additionally, arrivals of tourists from Russia have increased by 27.5% in 2013, with their proportion increasing in relation to those from the UK who nevertheless continue to hold the biggest market share.
In general, arrivals are expected to increase this year, especially from Russia (increase is estimated at 11%), whereas the “Open Skies” policy is expected to start decreasing the seasonality of tourist arrivals and extend hotel operations by one or two more months.
HOUSEHOLD DEBT AND NON PERFORMING LOANS (NPLS)
The percentage of NPLs appears to be stabilising, but remains at high levels which implies that collateral disposals are essential and that there is likely to be a need for further recapitalization of the banks in the foreseeable future, the Leaf Research study suggested.
More specifically, in 2013 there was an annual decrease of 7.1% in the total loans of households, with most household loans being housing loans (EUR 11.8 bln) equalling to 53% of total loans outstanding.
Total NPLs amounted to EUR 24.1 bln, which equals to 147% of estimated 2013 GDP.
The majority of NPLs are in the construction sector, amounting to EUR 4.62 bln. As at year end, NPLs equalled 53% for Bank of Cyprus and 47% for Hellenic Bank, whereas for the COOPs, as at 2013 Q3, NPLs stood at 47% of their portfolio.
TRANSACTION VOLUME AND PRICES
In 2013, the highest movement in total volume (31%) and property purchases by foreigners (38%) were recorded in Paphos district, while 27% of sale and purchase agreements across Cyprus involved foreign buyers. The smallest number of sale and purchase agreements (241) was recorded in Famagusta district (6% of total), whilst the lowest percentage of transactions to foreigners was recorded in Nicosia (13% of total transactions, 92 properties).
Prices decreased across all cities and for all types of real estate. The largest decrease was recorded for shops (42% decrease in relation to 2009Q4) and the lowest for houses (26% 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 Leaf Research forecast said.
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. 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,” explained Loizou.
Among the key measures being undertaken by the government are the privatisations of semi-public organisations, starting with CYTA, the EAC, and the Cyprus Ports Authority. In parallel, the public sector is undergoing significant restructuring, with early retirement schemes and abolition of mobility restrictions being implemented throughout.
Rationalising procedures and liberalising information exchange between government departments and financial institutions are expected to increase the pressure on borrowers and allow for the financial system to function more effectively in relation to the management of its multiple problems relating to NPLs.
An amendment in legislation for speeding up the process of real estate foreclosure is also underway, ensuring that properties are disposed of within 2.5 years of initiating legal proceedings for someone’s primary residence and 1.5 years for all other properties. Going forward, the establishment of NPL and property management units in all banks and COOPs is expected to serve as a platform for addressing the rising number of NPLs.
The full report is available at the Leaf Research website www.leafresearch.com
Get all the latest news and videos in your inbox. Register FREE