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Cyprus Residential Property Market – How Bad Could It Get?

Savage Bailout Only The Latest Contributor To Sector’s Already Parlous State

by Xavier Basil

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Bleak Times Ahead

Whichever way you try to slice it, the short- and medium-term prospects for the housing market in Cyprus are bleak. The only question is how bad might it get? How far can prices fall? Already observers are talking of ‘double-digit’ but that’s anywhere from 10 to 99 percent. Assuming though that ‘down to zero’ is not in prospect, and that there’s a pricing point at which demand will be stimulated, so halting and starting to reverse the seemingly inevitable downward trend, how might that bottom in Cyprus property values be identified?

A particular reason for pessimism is that the residential real estate market in Cyprus was in a parlous state well before March just gone, a month which will doubtless be looked back on as the country’s ‘mensis horribilis’, and which saw the original Eurogroup bailout deal summarily rejected by the Cypriot parliament only to be replaced by something vastly more unpalatable.

In its Cyprus Property Price Index for the fourth quarter of 2012, RICS - the UK’s professional body for chartered surveyors and property valuers – makes no bones about it:

There has been a dearth of investment transactions during the second half of 2012. Property, both commercial and residential, is viewed as a risky asset and one with negative prospects in the near to medium term. Local buyers in particular were the most discerning as the increase in unemployment and the worsening prospects of the local economy led to a sharp reduction in interest.

Several factors had combined to bring about this dire state of affairs: continuing economic slowdown since the Greek default shock of 2010, with year-on-year GDP contracting by 3.3%; a related rise in unemployment, hitting 14.7% by year-end; ongoing turmoil in the critical banking and finance sector; and an overarching sense of unease – dread even – as the country awaited the outcome of the protracted bailout negotiations which had started in June.

Housing Already Heading South

But in the housing sector specifically, there were factors of longer standing which contributed to Q4 2012’s dismal figures – a 3.1 percent slide in the value of apartments contributing to a slump of 26 percent in the three years since the fourth quarter of 2009, the last of the good times. And while the prices of single dwellings held up better, with just a 1.1 percent fall in Q4 2012, the three-year decline was 17.5 percent.

First and foremost, Cyprus has – and has had for a number of years now – a housing glut. The story is told in data from the country’s October 2011 census showing that in the decade since the previous count, so from 2001 to 2011, the number of households had grown by 31 percent, some 71,000 additional potential home-seeking family units, but there’d been more than a doubling in new home construction, from 70,000 to 147,000 dwellings. By 2011, according to the census data, Cyprus had a total housing stock of 431,059 but only 309,300 households to fill them.

New-builds Loom Large in Housing Glut

Drilling down into the 2011 census data, we see that of that total housing stock of 431,000-odd dwellings of all types, some 54,651 units were recorded as vacant (12.7 percent of the total inventory) and a further 71,942 (16.7 percent) as being for seasonal or secondary use only. In other words, in late 2011 nearly 30 percent of the national housing stock of Cyprus was surplus to requirements, inasmuch as those 126,593 dwellings were not being used by owners as a principal residence. This ‘overhang’ is even more pronounced when regard is had to construction during the boom years, the first decade of this century. Of the 147,000 housing units built between 2001 and 2011, which make up 34 percent of the country’s total housing inventory, some 58,566 were recorded in the 2011 census as being either vacant or for seasonal use. In other words, nearly 40 percent of the total housing built in the previous decade was not in 2011 being used as a primary residence.

Location-wise, 44 percent of this new construction was recorded in the census as ‘urban’ with 47.6 percent being ‘rural’. In urban areas, nearly 70 percent of those new-builds were apartments, whereas single dwellings accounted for 45 percent of new construction in areas designated as rural.

The Surplus Unevenly Distributed

In the country’s primary tourism area – the city of Limassol and its neighbouring seaside areas – the percentages of unoccupied or seasonal are lower than the national figure: just under 26 percent of all Limassol District’s housing being so recorded in the 2011 census, of which nearly 34 percent was built in the preceding decade. And in the capital Nicosia, inland from the beautiful Mediterranean shores but where the banking industry is centred, the housing surplus is lower again – 18.5 percent of Lefkosia District was recorded as vacant or seasonal, with 38 percent of those 26,500 dwellings constructed in the 10 years to 2011.

But up on the east coast, the housing surplus is much more pronounced. In the district of Ammochostos – better known to non-Cypriots as Famagusta – nearly 50 percent of the total housing, some 16,900 dwellings, was recorded in the 2011 census as either vacant or for secondary use only. There is of course a particular aspect to that state of affairs – the city of Famagusta itself having been under Turkish occupancy since the 1974 invasion and its seaside resort area of Varosha - once the playground of the world’s rich and famous - walled off ever since. Famagusta is not a destination of choice for most tourists or, for that matter, for Greek Cypriots themselves.

Many of the Greek Cypriots displaced in the 1974 hostilities were resettled in what was then a relatively unpopulated part of Cyprus – Paphos. The town and wider district occupy the north-western coast of the island and have attracted a disproportionate amount of state investment in the years since partition, primarily geared to developing the region’s tourism potential following the loss of Famagusta. So it must be of particular concern that, as Cyprus comes to grips with the severity of the Eurogroup bailout, at 46 percent nearly one in every two of the Paphos region’s homes are either vacant or seasonal, of which nearly 60 percent – three out of every five – were constructed in the decade to 2011.

Of course, a housing market is not concerned only with vacant and holiday homes – in any given market at any given time there will be a proportion of home-owners seeking to upgrade or downsize, or move from one locale to another. But allowing for that, the Cypriot surplus housing stats do not portend well for the future of its residential real estate market.

And what of that future, now that the terms of the Eurogroup bailout are known – including a level of detail contained in ‘the Memorandum’ which wasn’t supposed to be for public consumption but anyway got leaked into the media. Before looking at what the bailout will mean going forward though, we ought to look back at how the Cyprus property market got to where it is today. How is it that there should be such an imbalance between housing need and housing availability?

2000s Housing Boom – The British and Russian Influence

The answer surely lies primarily in two words – ‘British’ and ‘Russian’. The early years of the ‘noughties’ – the first decade of this century – saw an explosion of British investment in offshore housing as a booming economy, and soaring home values, in the UK incentivised ordinary British people to buy a second residence at some desirable seaside location elsewhere in Europe, accessing for the purpose readily-proffered bank credit backed by expanding first-home equity. From the Spanish ‘costa dels’ to the Black Sea in Bulgaria, British – and Irish, similarly motivated – investors poured in their tens of thousands into local airports and out to the estate agencies which had mushroomed overnight to meet, and of course stimulate, the demand.

And they came also to Cyprus, the former colony with its longstanding British ex-pat community, its familiar English laws and customs, and widespread use of the English language. The demand for holiday properties at desirable beachside locations in Paphos and Limassol triggered much of the building frenzy which is now the housing overhang. And primarily as a supposed investment, with buyers using their properties – once off the plans and on the ground - for perhaps a few weeks of the year and otherwise anticipating handsome rental returns. Cyprus property investment interest also spawned the speculative development of time-shares. By 2009, at the peak of the frenzy, local media in Paphos were reporting that Brit tourists couldn’t take a first sip of their Sexes on the Beach without being bailed up by a time-share tout.

Separately from the ‘Brit invasion’ came the Russians. Who, unlike the British, followed their money, already safely parked in trust accounts in accommodating Cypriot banks, which paid rates of interest unattainable elsewhere in the EU money markets and which asked no difficult questions. Russian owners of money and Russian servants of money began to flood – families in tow but more discreetly than the Brits – into a Cyprus with arms held wide in greeting. Destination of choice – Limassol; residence of choice – large, flashy, single-occupancy dwellings.

And whereas the British wave receded in the wake of tumbling UK housing prices from 2009, with anxious investors in very short order facing negative equity back home and sitting on partially-completed second-line studios, title deeds stalled somewhere in the notoriously inefficient Cypriot land transfer system, the Russians and their money kept coming. So that Limassol got itself dubbed Limassolgrad and its enthusiast new citizens opened their own banks, built their own schools and churches and donated generously to the city’s civic amenities.

According to the 2011 census, there were 31,495 residents of Cyprus who confessed to being British on census night and just 10,520 people who put their hands up as Russian. The anecdotal evidence – and widespread media belief – is that the true numbers are much higher, with perhaps 60,000 Brits and tens of thousands more Russians effectively living on the island but flying under the radar. It can’t be known of course, but it can be safely assumed that in each case many are fly-by-nighters, in Cyprus because that’s where the money is but ready and able to leave when the money does.

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