It is now a well-known fact that the Eurozone economy has entered recession as a result of the banking sector exposure to the sub-prime mortgage market in the United States and the subsequent credit crunch.
The major Cypriot banks, which were not exposed to the American sub-primed mortgage market, remain profitable although there has been a slowdown in their growth rates. Specifically, during the first six months of 2008 the net operating profits and government taxes received from the banking sector dropped by 15.9% and 22.3% respectively compared to the same period of 2007.
The overall global economic climate has also affected the Cypriot consumer confidence. Already, there has been a reduction of mortgages by the Cypriot banks. Moreover, the increased exposure of Cypriot banks in Greece has rendered them particularly vulnerable to a potential slowdown of the economy of Greece.
Consumer confidence reached its lowest level in December 2008 since August 2005. Overall economic sentiment, which includes both consumer and business confidence, carried on its downward trajectory. The impact of the global slowdown and weaker consumer spending has made businesses more pessimistic regarding the current economic environment.
The impact of the global downturn is obvious in the predictions of the Ministry of Finance for the main macroeconomic indicators for year-end 2009:
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Gross Domestic Product for the Cypriot Economy
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2005
(€/Millions)
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2006
(€/Millions)
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2007
(€/Millions)
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2008 (€/Millions)
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2009 (Predicted)(€/Millions)
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13,462.3
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14,435.2
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15,565.6
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16,933.2
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17,977.8
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3.9%
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4.1%
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4.4%
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3.9%
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0.3%-1.0%
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Source: Ministry of Finance
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The inflation rate constitutes a major uncertainty given the large swings in the price of oil and other commodities. Based on the harmonised definition, inflation averaged 4.8% in 2008, significantly lower than had been expected earlier in the year, owing to the fall in the price of oil. Inflation is forecast to 2.5 % in 2009 and to stay around 3% in the medium term.
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Inflation for the Cypriot Economy
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2005
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2006
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2007
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2008
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2009(Predicted)
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2.0%
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2.2%
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2.2%
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4.8%
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2.5%-3.0%
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Source: Ministry of Finance
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The unemployment rate is seen deteriorating to 4.1% for year-end 2009.
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Unemployment Rate for the Cypriot Economy
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2005
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2006
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2007
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2008
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2009 (Predicted)
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5.3%
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4.5%
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4.3%
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4.1%
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4.1%
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Source: Ministry of Finance
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Cypriot Real Estate Market
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The overall negative economic climate is beginning to affect both demand and supply for new construction. More specifically, the number of planning permission applications has fallen by 10% from 7,166 applications to 6,477 between January-September 2008 compared to the same period of 2007.
It should be noted that the greatest decrease in the number of planning permission applications was originated from the residential sector and was around 12%. In terms of reduction in planning permission applications per city, the greatest reduction was noted in Famagusta at around 32.4% for the first nine months of 2008, with Larnaca coming second with the a drop of around 14.5%.
The latest figures available from the Cyprus Land Registry show that the number of property sale contracts transacted between January and November 2008 showed a 27.9% year-on-year reduction, while contracts transacted in November showed a 60.5% year-on-year decline.
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Details
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Percentage Reduction
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Property Registrations (Oct '07-Oct '08) ¹
Sales in Coastal Areas ¹
Planning Permission Applications ²
Property Sale Contracts (Jan-Nov '08) ²
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↓ 24%
↓ 40%
↓ 10%
↓ 27.9%
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Sources
1. Cyprus Property Valuers Association and the Real Estate Agents Association.
2. Department of Lands & Surveys
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Property professionals in Cyprus have noticed that the market in each area is reacting in a different way and also that there is a distinct change in buyer demographics. UK buyers are no longer flocking to the popular coastal areas of Paphos and Famagusta, where there is a reduction in demand of as much as 25%, nor to Larnaca where the demand is down on average, 10%. Nicosia, the capital, which is mainly a Cypriot-based market, remains active and stable and this applies to the Limassol market.
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Impact on Government Revenue due to the Slowdown of the Real Estate Market & Government Initiatives
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Cyprus attracts about 2.4 million tourists a year, half of them from the United Kingdom but as a result of the UK recession and the depreciation of the pound sterling there has been a pronounced reduction in the number of British tourists visiting Cyprus. This obviously results in a drop of Government Revenue from the tourist sector but also a fall in property demand by UK nationals.
Russia, which is seen as an important economic partner of Cyprus, was forecast by the IMF to grow by 6.8% in 2008, reflecting a stronger-than expected performance early in the year and initial substantial terms-of-trade gains. On the other hand, growth was set to weaken appreciably in 2009 (3.5%), reflecting slowing world demand and tightening financial conditions. Moreover, falling commodity prices, particularly for oil and natural gas, are depressing export earnings and government revenues, putting pressure on the rouble and dampening prospects for growth in 2009. This has obviously affected demand in the Cypriot real estate market and a reduction in Foreign Direct Investment (FDI) from Russia.
In terms of Government Revenue received from the construction sector there was a substantial reduction during the first nine months of 2008. In more detail the following decreases were noted:
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Percentage Reduction in Government Revenue
Received from the Real Estate Sector
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Transfer Fees
Stam Duties
Capital Gains Tax
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↓ 6%
↓ 2%
↓22%
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Source: Ministry of Finance
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This has been a wake up call to the Cypriot Government and like many governments around the world, the Cypriot government will invest substantial amounts to accelerate the growth of the local economy and keep unemployment down in the face of global economic downturn. So far, it has committed €350 million to accelerate the Cypriot Economy.
Recently it announced that the tourism sector would receive around €51 million which would result in, among other things, a lowering of the high landing fees that are currently paid by airlines and a reduction in the VAT rate for overnight stays in hotels from 8% to 5%.
The construction sector (and by extension, property investment) will also benefit by more than €200 million and part of that will include special loan schemes for low and middle-income families.
However it should be taken into account that wealthy Cypriot buyers looking to purchase property on the cheap could help sustain the country's construction and property sectors. Moreover, interest is expected to increase by the four new marinas that the state is building to boost tourism.
Limassol will be one of the prime areas to benefit from major infrastructure development including the construction of a marina project which will be constructed at the heart of the old Limassol's seafront. The creation of the marina will transform the area and bring a more diverse range of tourists to the island. Luxury developments at Limassol, are also being planned aimed at high end spenders.
There has always been property demand from high net worth individuals mainly Russian who are continuing to buy exclusive beach front developments. Beachfront villas are being sold at prices starting at €4 million. Moreover, increased demand has been noted recently by companies and high net worth individuals from countries like South Africa, Israel and the Middle East.
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This report is intended for general information purposes only. Information herein has been obtained from sources believed reliable. While every effort has been made to ensure its accuracy and completeness,we cannot offer any warranty that factual errors may not have occurred. GVA Emirah accepts no responsibility for any damage or loss suffered by reason of inaccuracy or incorrectness of this report.