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Stagnant construction & property sector

Cyprus is not Europe. In many European countries the situation is bleak as activity and prices have plunged to levels that leave little room for hope.

property-developmentTHE fast pace of growth in the construction and property sector of the past few years in Cyprus that generated millions in state revenue and private profits is a thing of the past.

Today, experts from both sectors are gloomy about the prospects and say a repeat of the previous ‘miracle’ is not possible in the immediate future.

Sales of property are significantly down from the middle of last year, construction activity is in retreat and all point to an uninspiring future.

So far, prices have held relatively steady, but experts say that the situation is becoming more serious, and pressure for price cuts more intense.

Cyprus is not Europe. In many European countries the situation is bleak as activity and prices have plunged to levels that leave little room for hope.

Charalambos Petrides, of Landtourist Estates Ltd, says that subdued purchasing interest on the island over the past few months is due to two main reasons – first, uncertainty over the economy in combination with financing difficulties, and secondly, the pressure on revenue in the main markets involving foreign buyers.

“People do not consider the current period as a good one for investments, unless exceptionally good opportunities appear”

A third reason, he adds, is the conviction of many Cypriots interested in buying a home that prices will fall significantly in the immediate future, a conviction which has led them to adopt a wait-and-see approach.

There is interest to buy,” says Petrides, “but people are cautious.” More than 90% of the interest is for own homes, while the investment sector remains inactive.

People do not consider the current period as a good one for investments, unless exceptionally good opportunities appear. When price rises are not visible in the future, then investors are hesitant.

Sales of property

The Department of Land Surveys’ figures on sales leave no room for optimism.

On the contrary, if the figures are combined with the projections of the experts in the field, the picture is a very pessimistic one. The current, acute problem was visible from last March. The drop in the sale of property in March 2008 was the first in years and stood at a high rate of 30%. Since then the trend remains unchanged – down, down and down. The year elided with an overall drop of 31% over 2007 while the first three months of 2009 have followed suit. January, February and March this year have registered a drop of 65% over the same period in 2008.

Property sales down by 65%, construction activity down by 4.8%, and state revenue from Capital Gains Tax down by 83%

Sales to non-Cypriots that had maintained the sector’s momentum for more than three years are also disappointing. From 932 sales made in 2008, there were only 90 registered at the Land Survey Department in the first three months of the year.

The free Famagusta area has taken the biggest toll since only one piece of property was sold to non-Cypriots in the first quarter compared to 41 in 2008 and 69 in 2007. In other districts, sales were in double digits.

In Nicosia there were 19 sales in the first three months of 2009 compared to 211 in all of 2008, in Larnaca 12 compared to 153 the previous year and in Paphos 10 in the first three months of 2009 compared to 282 last year.

Building permits

Despite the gloom of the previous months, January figures on building permits gave a glimmer of hope for the construction sector.

At the start of an anticipated difficult year, the Statistical Survey announced an increase in building permits – an important indicator on future activity in the construction sector since their increase means a corresponding rise in activity.

According to the Statistical Service, last January the number of building permits rose to 694 compared to 687 in the same month in 2008. The rise of only seven licences may appear small, but it corresponds to €40.9m since the total value of the 694 permits stood at €234.1m compared to €193.2m in the corresponding month in 2008.

January’s building permits mean the construction of 1,585 homes of a total area of 2,789,000 sq metres compared to 1,229 homes of a total area of 2,498,000 sq. m in January 2008. Of the 694 building permits, 543 were for residential units.

The biggest increase in building permits was seen in Famagusta where it doubled – in January 2008 16 applications were submitted while in January 2009 the figure was up to 37.

There was an increase also in Nicosia (from 204 in January 2008, to 257 in January 2009) and in Paphos where the 132 permits of last January rose to152. Numbers for Larnaca and Limassol districts were down. In Larnaca, building permits this January stood at 119 compared to 128 in January 2008, while in Limassol the drop was dramatic as applications slumped to 129 from 207.

Lower state revenue

The slump in the property sector has taken its toll on state coffers. According to the most recent figures from the Inland Revenue Department in the first two months of 2009 state revenue from capital gains tax had plunged by 83%.

The state budget for 2009 projects revenue of €350m for the entire year, but it collected less than €10m from capital gains in the first two months, compared to the €57m it netted in the same period the previous year. Revenue from the stamp duty in the first two months was down by 44% to some €7m, compared to €12m in the same period in 2008.

Construction down

Another parameter confirming all the above is the fall in the construction production index.

In the last quarter of 2008, it was down by 4.8% compared to the corresponding period in 2007 showing that the slump intensified at the end of last year.

The retreat in construction activity is also reflected in domestic cement sales. These were 27.5% in the first three months.

Reviving the sector

These past two months, the government has unveiled a series of measures aiming to revive the property and construction sectors.

Already from the last months of 2008, it had made clear it wanted to speed up implementation of the state’s development programme with an additional €150m channelled into the 2009 budget for this purpose.

Emphasis was also given mainly to the construction and expansion of school buildings, the building of government premises, expansion of the road network and the promotion of social benefit projects. Renovation of state housing and the replacement of antiquated irrigation systems in 63 rural communities were also accelerated.

In the constructions sector, the government announced on February 3 that it would boost the House Financing Corporation with €200m so as to facilitate low and middle income families to acquire their own home.

The loans are interest free for two years and have favourable terms for the rest of the repayment period. This measure is expected to give impetus to the market for apartments since this is where young couples entitled to the loans on the basis of income-linked criteria are expected to turn.

Copyright © 2009 Cyprus Weekly

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