Where is the Cyprus property market heading?
I have been asked this question countless times over the past three months, primarily by foreign investors who are trying to appreciate how the rise in inflation, increase in interest rates, and war in Ukraine is affecting local market dynamics.
In a nutshell: Things will be better than most people expect in terms of demand and prices but worse in terms of amplifying income inequality and creating future imbalances (which no one seems to care about).
The property market is split into three main groups living parallel lives on “the rock”, forever going about their daily lives without interacting with one another.
The first group are Cypriots who live in Nicosia, who, in their majority, are employed by the government, banks, or associated companies, i.e., service providers to the government and banks.
These employees have (inflation) index-linked salaries, strong union protection, work for “inward-looking companies”, their clients are locals and are risk averse.
The Nicosia property market is the least likely to be affected by external factors.
However, there is some scaling back of investment due to the rise in interest rates and of building sizeable primary residences due to the increase in construction costs.
The second group are foreign nationals who have moved to Cyprus to work in the financial services, shipping, and, more recently, the ICT (information and communications technology) sectors.
These individuals are, in their majority, highly skilled/ paid and primarily concentrated in Limassol.
Over the past three months, thousands have been moved to Cyprus by their employers due to tax incentives (headquartering and income tax related) and relocation from Ukraine, Russia, and Belarus.
The Ministry of Interior stopped providing relevant statistics after April, but until then, 14,000 Ukrainians had moved to the island (no corresponding numbers were announced for Russians and Belarussians).
It would be logical to assume that the overall number of individuals who have moved to Cyprus from these three countries since February is circa 20,000 (equivalent to a 1.75% increase in the country’s population).
To these, we must add the Lebanese who have been moving to Cyprus over the past 3-5 years (at an increased pace since the explosion in Beirut in August 2020) and Israelis who have accelerated their investment activity in Larnaca (more recently in Paphos).
Residential rental prices in Limassol are at an all-time high, with those in Larnaca and Paphos rising.
Whilst this is primarily driven by the recent influx in population, some sizeable infrastructure projects are also “coming online”.
They are the new university in the centre of Paphos (American University of Beirut), the new road connecting Paphos to Polis (underway), the redevelopment of Larnaca’s port and marina (by Kition Ocean Holdings Ltd, an Israeli-Cypriot consortium), the relocation of Larnaca’s petrochemical processing plants.
There is also significant demand for grade A office space to accommodate these new companies/demand, along with demand for better quality shopping & leisure experiences and private schools.
We don’t expect that demand/pricing for the above will diminish over the next 2-3 years, primarily as supply is “sticky” and will take a while to react to the new landscape.
The third group are those locals who rely on foreign businesses or investors.
They command higher salaries, either because of their skillset (technical or linguistic) or because they have managed to gain their trust.
These individuals are “riding the wave”, having become experts at drinking quality gin and vacationing in Mykonos.
One should remember that a surfer only spends 8% of their time riding waves, with 54% spent paddling and 28% waiting for waves.
Caution is advised, especially as life is a long-term commitment.
Two smaller groups are also worth mentioning.
The British expats who live in Paphos and Larnaca are now either moving back to the UK (to take advantage of the NHS) or have handed over their residences to their children.
There are also thousands of Eastern Europeans (Bulgarians and Romanians) and migrants from sub-Saharan Africa who are living in dated buildings in city centres and exploited by traffickers.
They are “the unseen” people of Cyprus.
Let me bore you with expectations over the mid-term.
There are tens of sizeable projects under construction or planned across the island, especially in Limassol, Larnaca, and Paphos (in this order).
Most of these target high-end foreigners, particularly individuals looking to move to Cyprus for employment or coming for a holiday.
These projects are becoming bigger and bigger, increasingly not developed by locals or financed by local banks.
Furthermore, the companies moving to Cyprus are not employing so many locals, mainly because of a mismatch between the availability of “local talent” (teachers, accountants, and lawyers) and what they demand (programmers, engineers).
We are seeing the development (and split) of two worlds, where inequality will become more pronounced, and income mobility will decrease.
Unfortunately, the Cypriot government is sleepwalking (again) and is focused on building roads and amending the tax regime rather than reforming the education and justice systems.
With the “Cyprus problem” solved (nothing is happening), Russian business moving out (that impact will be “felt” from Q4 onwards, as some are still trying to reorganise their operations), and the country not part of the EastMed gas pipeline (the latest configuration is Israel, Egypt, and Greece), the extent of the dichotomy remains to be seen.
By Pavlos Loizou, CEO, WIRE