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Cyprus economy & real estate forecast 2014-2015

real-estate-market-predictionDESPITE the expected stabilisation and minor recovery of the economy, the increase in the gap between rich and poor and the downturn in the real estate market are likely to  continue further, according to the latest Cyprus Economy and Real Estate Forecast conducted by Leaf Research.

In regards to Real Estate, an increase in supply of grade B office space and resales of holiday homes, combined with decreased demand, are likely to subdue any forthcoming price recovery. It is estimated that in the near term, real estate prices, especially that of land, will decrease further as no substantial uplift in the price of the end product is expected, the rate of sale is likely to remain slow, and no debt-finance will be available.

In the short term, the biggest challenge will be the prospect of developing within the British Bases, since this will significantly increase the supply of available land in Larnaca and Limassol. In the medium term, the economy will face the ongoing challenge of the banks’ deleveraging and foreclosure of real estate assets, while in the long term there will be multiple policy issues relating to the reckless incentives provided to boost construction by granting additional building density for various developments which has created ‘pent up’ oversupply.

It appears that transaction volume is at its lowest levels, whilst prices are most likely to continue decreasing in the short term due to subdued demand. Demand remains low mainly because unemployment remains at a high level and is expected to further increase in 2014. Nevertheless, positive prospects for the Cyprus Economy and Real Estate market are starting to become visible as the worst part appears to be past us and we have entered a period of tentative stabilisation.

GDP & Unemployment

With regards to Gross Domestic Product (GDP) and Unemployment, the forecasted economic stabilization and GDP growth onwards from 2015 are unlikely to be enough to alter the general situation in the economy and the labour market any time soon. The decrease in GDP for 2013 was limited to 5.3%, which can be positively compared to the original forecast for a 8.7% decrease. Revised forecasts indicate a minor decrease of GDP during 2014 and an increase of 1.1% in 2015. At the same time the unemployment rate reached 17.5% in December 2013 and is expected to increase further during 2014, peaking north of 19.0%. The expected recovery from 2015 onwards is estimated at GPD growth of 1.0-1.5% annually, which is unlikely to decrease the unemployment level below 10% before 2020.


Even though there was an increase in income from tourism (+8% in 2013), hotel owners are in a difficult position due to their levels of indebtedness. Furthermore, they have not invested in their hotels for a long time, which has resulted in their product offering being somewhat inferior when compared to other markets.

It should be noted that despite a 2.4% decrease in tourist arrivals in 2013, there has been a notable increase of 8% in the income received from tourism  in comparison to the previous year. Additionally, arrivals of tourists from Russia have increased by 27.5% during 2013, with their proportion increasing in relation to those from UK who nevertheless continue to hold the biggest market share. In general, arrivals are expected to increase during 2014, especially from Russia (increase is estimated to reach circa 11%), whereas the “Open Skies” policy is expected to start decreasing the seasonality of tourist arrivals and extend hotel operations by one or two months.

Household Debt and Non-Performing Loans (NPLs)

The percentage of NPLs appears to be stabilising, but remains at high levels which implies that collateral disposals are essential and that there is likely to be a need for further recapitalization of the banks in the foreseeable future.

More specifically, in 2013 there was an annual decrease of 7.1% in the total loans of households, with most household loans being housing loans (€11.8 billion) equalling to 53% of total loans outstanding. Total NPLs amounted to €24.1 billion, which equals to 147% of estimated 2013 GDP. The majority of NPLs are recorded in the construction sector, amounting to €4.62 billion. As at year end, NPLs equalled 53% for Bank of Cyprus and 47% for Hellenic Bank, whereas for the COOPs, as at 2013 Q3, NPLs equalled 47% of their portfolio.

Transaction Volume and Prices

In 2013, the highest movement in total volume (31%) and purchases by foreigners (38%) were recorded in Paphos district, while 27% of sale and purchase agreements across Cyprus involved foreign buyers. The smallest number of sale and purchase agreements (241) was recorded in Famagusta district (6% of total), whilst lowest percentage of transactions to foreigners was recorded in Nicosia (13% of total transactions, 92 properties).

Prices decreased across all cities and for all types of real estate. The largest decrease was recorded for shops (42% decrease in relation to 2009 Q4) and the lowest for houses (26% decrease). The largest overall price decreases were recorded in Nicosia, since the capital was the last city to be affected by the crisis and its economy is largely reliant on the public and banking sectors.

The decrease in transaction volume and the drop in property prices does not present an accurate picture of the property market. There is a dearth of demand for land purchases (especially fields) and for constructions in secondary locations. In multiple cases, especially for “mass production” real estate, even though prices are below construction costs, there is no demand. Prime real estate attracts limited demand, but at distressed prices and usually in conjunction with payments involving ‘blocked’ deposits.

2014 Milestones

Among the key measures being undertaken by the government is the privatization of semi-public organisations, starting with CYTA, the EAC, and the Cyprus Ports Authority. In parallel, the public sector is going under significant restructuring, with early retirement schemes and abolishment of mobility restrictions being implemented throughout.

Rationalising procedures and liberalizing information exchange between government departments and financial institutions are expected to increase the pressure on borrowers and allow for the financial system to function more effectively in relation to the management of its multiple problems relating to NPLs. An amendment in legislation for speeding up the process of real estate foreclosure is also underway, ensuring that properties are disposed of within 2.5 years of initiating legal proceedings for someone’s primary residence and 1.5 years for all other properties. Going forward, the establishment of NLP and property management units in all banks and COOPs is expected to serve as a platform for addressing the rising number of NPLs.

Asset Class
Capital Value Forecast 2014-2015
Housing Plots(-) 17%
Commercial Plots(-) 32%
OfficesCat A (-) 16%
Cat B (-) 23%
ApartmentsCentre (-) 13%
Secondary locations (-) 16%
Touristic locations (-) 12%
ShopsCentre (-) 17%
Secondary locations (-) 19%
Touristic locations (-) 9%
Fields(-) 28%

Capital Values – 2014 & 2015 Forecast (in comparison to 2013)

Further Reading

Leaf Research Cyprus Economy and Real Estate Forecast for 2014-2015

About Leaf Research

Leaf Research provides real estate advisory services, valuation, and market research, utilising financial models to examine, analyse, and assess the risks associated with real estate investments.

Pavlos Loizou MRICS
Managing Partner