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Storm clouds darkening over Cyprus

An economist report has highlighted a number of significant problems in the Cyprus property market and warns that prices have still to fall from their already depressed levels before they bottom out.

Thunderstorm in Ayia Napa Cyprus

Thunderstorm in Ayia Napa Cyprus

A SERIOUS stock overhang, weakening occupational and investment demand and the consequences of a worsening Greek banking situation do not bode well for the Cypriot real estate market, made worse as speculative supply kept being added ‘long after demand had begun to weaken, an analyst report has concluded.

We are convinced the Cyprus property market faces further downward price adjustments on top of those already recorded,” said Savvas Savouri, partner and chief economist at Toscafund Asset Management LLP in a market report.

Spain’s ongoing problems should be seen as a warning of what awaits Cyprus. Whilst the investment outlook for vacation and retirement related real estate is a worry across all of continental Europe, in the Cypriot market participants Jo not seem to have awoken to the, threats,” Savouri noted in his report, an advance copy of which was obtained by the Financial Mirror.

Cyprus faces downward property price corrections

Whilst we hold concerns for vacation and retirement real estate across all of Europe, for Cyprus our alarm is heightened by the pervasive influence of Greek banks. Their arrival was of course at first favourable, bringing as they did capital that made its way into the property sector. However, their involvement when Greece itself is facing serious economic challenges risks making a bad situation worse.

As Greek banks become ever more distressed from their domestic and Balkan-wide loans, Cyprus will be unable to avoid being sucked of liquidity. From already depressed levels Cyprus faces downward property price corrections,” Savouri warned.

Selling or filling tourist and retirement property in Cyprus now means competing against Spain, Croatia, Bulgaria, Turkey, Lebanon and even Dubai and Florida.

Outside the eurozone there is a growing likelihood that Croatia, Turkey and Bulgaria will become ever more competitive relative to Cyprus.

Since 2009Q1 there has been no official Cypriot property price index. Any honest assessment of pricing since then would find widespread breaching of loan-to-value (LTV) covenants, said the Toscafund report.

The market quite simply is far from having reached a bottom

Whilst we suggest the price correction may take two years or more, the process could be swifter. Our emphasis is the quantum of price correction more than its length. Those who view recent weakness in Cypriot property prices as an opportunity to pick up value will find no shortage of sellers. The market quite simply is far from having reached a bottom,” noted Savouri.

Buy-to-let collapse

Like Spain, Cyprus recorded a considerable boom in construction as its market for holiday and retirement property grew. Indeed, even into 2009 when Cyprus appeared to shrug off the recessionary conditions taking hold elsewhere, the positive first quarter growth was largely due to speculative construction. In effect, even as demand fell, supply kept coming.

Having declined by almost a fifth between 2008 and 2009 tourist levels have continued to slide. The income demanded by Cypriots and non-nationals who adopted speculative “buy to let strategies” have fallen in turn.

This is particularly alarming since at 122%, Cyprus’ private sector has one of the highest ratios of household debt to GDP, the report said. With so many personal loans secured on property and funded out of tenant income, the banking system is as vulnerable to loan non-performance as covenant breaches. In short, the IMF’s somewhat ambiguous prediction of a “tepid but uncertain recovery starting in 2010” is overgenerous at best, Savouri added.

Equity market

The Cyprus Stock Exchange (CSE) should be considered a barometer for the Cypriot economy, not least because three banks – Bank of Cyprus, Marfin Laiki and Hellenic Bank – make up almost 90%. In fact the CSE is Europe’s most concentrated equity benchmark, even ahead of the Greek ASE whose top ten constituents account for almost 95% of the index and five of which are banks.

The concentration of the Nicosia and Athens exchanges to banks, some with dual listings, is something which threatens a sharp equity market correction.

The worsening economic prospects in Greece and Cyprus must at some point hit the banks. If the CSE were to fall as sharply as we fear, any decline would worsen the wealth shocks coming from falling real estate prices and damage already poor fundamentals across the wider economy, the Toscafund report added.

An already steep fall in property prices would become a rout

There is also the concern that banks would demand loans be recapitalised or foreclosed in an effort to recoup some value through quick sales.

An already steep fall in property prices would become a rout, with weakness in Greece feeding into Cyprus through a number of channels, concluded Savouri.

Toscafund is one of London’s largest hedge funds and private equity firms. In 2006 it played a significant role in facilitating the Marfin purchase of Laiki Bank.

Financial Mirror

Readers' comments

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  • claire t says:

    I am really worried about the Greek deficit. I bought a holiday home at then end of 2008 when cyprus was number one a place in the sun. But it turned out to be the worst possible time to buy the euro value went way down flights went way up and we had 2 lets in 12 months. Our house was bought mainly to to rent out and although rentals are picking up now the house is mortgaged with marfin laiki bank who are greek/cypriot bank. We have no title deeds and i do not know where we stand with the banks the own 70% and i am really worried how this affects property owners with a mortgage with a greek/cypriot is the EU going to bail out the banks and if so what impact will this have?????

  • peter says:

    @Josephine Kelly, I think u summed it up very succinctly. I believe it is only a matter of time b4 the other shoe drops and we get “council tax”, I cant see income tax and consumption taxes covering the bills. Are they stupid enough to kill the golden goose? probably, look at the ridiculous taxation on cars.

  • Josephine Kelly says:

    If you could ascertain the number of those retirees who have fallen foul of developers, and/or builders, planners, banks, endlessly slow red tape and lack of clear directive, then our story would be in amongst those who experienced these things during and after buying a new build, stayed for a few years of uphill struggles too numerous to mention, wearied and got out, lucky to have found a buyer.

    As I see it now, the only advantage to choosing Cyprus, apart from the weather, is the offset of no Council Tax in Cyprus against rising food, fuel and utility prices there.

    If ever this tax was imposed by the Cyprus government, then it would be dire indeed for those who rely on UK incomes and have burnt their boats.

  • Hector says:

    The Cyprus property market both north and south of the island is not helped by the outdated, inadequate laws and government systems to protect home owners. Many buyers in the south have been waiting years for their title deeds and cannot sell. In the north buyers have been devastated by finding that builders have taken out mortgages on their property even after they have paid in full. They now face repossession by the banks or the banks simply auctioning their homes.

    The Oram’s legal case has also devastated the market, with the couple facing the UK courts taking their UK home to pay the compensation and legal fees after they were sued in Cyprus for having bought a villa built on ‘exchange’ land which thousands of other UK citizens have done, having assured by their lawyers and estate agents that it was perfectly legal.

  • The views expressed in readers' comments are not necessarily shared by the Cyprus Property News.

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