A serious stock overhang, weakening occupational and investment demand and the consequences of a worsening Greek banking situation do not bode well for the Cypriot real estate market, made worse as speculative supply kept being added long after demand had begun to weaken, an analyst report has concluded.
“We are convinced the Cyprus property market faces further downward price adjustments on top of those already recorded,” said Savvas Savouri, partner and chief economist at Toscafund Asset Management LLP in a market report.
“Spain’s ongoing problems should be seen as a warning of what awaits Cyprus. Whilst the investment outlook for vacation and retirement related real estate is a worry across all of continental Europe, in the Cypriot market participants do not seem to have awoken to the threats,” Savouri noted in his report, an advance copy of which was obtained by the Financial Mirror.
“Whilst we hold concerns for vacation and retirement real estate across all of Europe, for Cyprus our alarm is heightened by the pervasive influence of Greek banks. Their arrival was of course at first favourable, bringing as they did capital that made its way into the property sector. However, their involvement when Greece itself is facing serious economic challenges risks making a bad situation worse. As Greek banks become ever more distressed from their domestic and Balkan-wide loans, Cyprus will be unable to avoid being sucked of liquidity. From already depressed levels Cyprus faces downward property price corrections,” Savouri warned.
Selling or filling tourist and retirement property in Cyprus now means competing against Spain, Croatia, Bulgaria, Turkey, Lebanon and even Dubai and Florida. Outside the eurozone there is a growing likelihood that Croatia, Turkey and Bulgaria will become ever more competitive relative to Cyprus.
Since 2009Q1 there has been no official Cypriot property price index. Any honest assessment of pricing since then would find widespread breaching of loan-to-value (LTV) covenants, said the Toscafund report.
“Whilst we suggest the price correction may take two years or more, the process could be swifter. Our emphasis is the quantum of price correction more than its length. Those who view recent weakness in Cypriot property prices as an opportunity to pick up value will find no shortage of sellers. The market quite simply is far from having reached a bottom,” noted Savouri.
BUY-TO-LET COLLAPSE
Like Spain, Cyprus recorded a considerable boom in construction as its holiday and retirement market grew. Indeed, even into 2009 when Cyprus appeared to shrug off the recessionary conditions taking hold elsewhere, the positive first quarter growth was largely due to speculative construction. In effect, even as demand fell, supply kept coming.
Having declined by almost a fifth between 2008 and 2009 tourist levels have continued to slide. The income demanded by Cypriots and non-nationals who adopted speculative “buy to let strategies” have fallen in turn. This is particularly alarming since at 122%, Cyprus’ private sector has one of the highest ratios of household debt to GDP, the report said.
With so many personal loans secured on property and funded out of tenant income, the banking system is as vulnerable to loan non-performance as covenant breaches. In short, the IMF’s somewhat ambiguous prediction of a “tepid but uncertain recovery starting in 2010” is overgenerous at best, Savouri added.
EQUITY MARKET
The Cyprus Stock Exchange (CSE) should be considered a barometer for the Cypriot economy, not least because three banks – Bank of Cyprus, Marfin Laiki and Hellenic Bank – make up almost 90%. In fact the CSE is Europe’s most concentrated equity benchmark, even ahead of the Greek ASE whose top ten constituents account for almost 95% of the index and five of which are banks.
The concentration of the Nicosia and Athens exchanges to banks, some with dual listings, is something which threatens a sharp equity market correction.
The worsening economic prospects in Greece and Cyprus must at some point hit the banks. If the CSE were to fall as sharply as we fear, any decline would worsen the wealth shocks coming from falling real estate prices and damage already poor fundamentals across the wider economy, the Toscafund report added.
There is also the concern that banks would demand loans be recapitalised or foreclosed in an effort to recoup some value through quick sales. An already steep fall in property prices would become a rout, with weakness in Greece feeding into Cyprus through a number of channels, concluded Savouri.
Toscafund is one of London's largest hedge funds and private equity firms. In 2006 it played a significant role in facilitating the Marfin purchase of Laiki Bank.
