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WARNING lights flash whenever someone tells me they are planning to invest in property.
It is a market we all think we know something about. But often our knowledge is based on nothing more than having bought a house for our own use or having rented a commercial property.
In Cyprus, as in most EU countries, the value of property has grown steadily, if gradually, over the years and rental incomes have increased accordingly. That makes property a sound investment but not necessarily a great one in terms of yield.
Moreover, a look at the graph will show that the steady rise of property values is interrupted every few years by sharp declines. In time, the market always recovers but a short-term investor with limited funds can be badly caught out.
It is a difficult market to interpret. Just how difficult was brought home to me by two views of Cyprus property I read recently.
The market here has been growing impressively. According to the RICS Cyprus Property Price Index, issued in June last year, the average price of apartments increased by 7.6 per cent, houses by 4.8 per cent, offices by 11.6 per cent, warehouses by 4.2 per cent and retail premises by 1.7 per cent. With the exception of retail, all were ahead of GDP which grew by around 4 per cent last year.
This made investment in real estate in Cyprus “worthwhile for foreign and local investors for all types of property”, according to George Coucounis, a lawyer specialising in property law.
He told readers of the Cyprus Mail that last year “was one of the best in recent years regarding property sales and investments, focusing on the tourist industry, selected investments for the acquisition of a Cyprus passport, the sale of used houses and apartments in urban and nearby areas”.
But some of these very factors are what worries the distinguished economist Christopher Pissarides. He fears they could be inflating a property bubble, particularly the citizenship-by-investment programme.
“The property market in Cyprus is growing at a rate that’s out of sync with the fundamentals of the economy at large, such as GDP, demand and demographics,” he told the Cyprus Mail.
Pissarides fears that the upsurge in demand for property is being driven by artificial factors. The 2010 Noble Laureat, who is now based in London, argued that investors are not looking to acquire Cypriot citizenship so that they can live and work on the island.
“What they’re after is a European passport.” he said. “I’m in London now, and I bump into people who tell me they live in the UK but have a Cypriot passport. When I ask them how they got the passport, they say ‘Oh, I bought a house in Limassol’. This whole business reminds me of the sham marriages scheme.”
Coucounis claims there has been change of attitude and people are investing prudently in real estate through their own funds rather than through loans. This, he says, “creates a healthy and controlled property market adding value to properties and avoiding the financial bubble of the past”.
Pissarides says: “It looks like we may be creating another bubble in the property sector.”
Only time will tell who is right. But the differing forecasts confirm my view that the property market should be handled with care. It is one thing to buy a property for your own use and hope it increases in value. It is quite another matter if you are investing with the purpose of safeguarding or growing your wealth.
That is best done through a managed, structured scheme that does not put all its eggs in one basket.
The Woodbrook Group offers comprehensive financial planning and investment consultancy services. We begin by learning about each client’s financial position and where they would like to be in the future. Once we understand your objectives, we look at all the options available.
‘As safe as houses’ was a phrase that once denoted total security. We can show you options that do not depend on houses – and they will be all the safer for that.
