In its recent financial stability report, the Cyprus Central Bank notes that “even a relatively small deterioration in the performance of the property sector could have a significant negative impact on the profitability and capital adequacy of banks and other credit institutions.”
Currently, Cyprus banks are saddled with thousands of properties, which have either been used as collateral for loans or acquired through debt to asset swaps.
By the end of June 2020, various credit institutions owned 7,629 properties with a total market value of €2.4 billion on their balance sheets, which represented 3.2% of the banking sector’s total assets. These properties included:
- 4,330 residential properties worth €943 million
- 1,030 commercial properties €910 million
- 1,464 agricultural plots worth €139 million
- 805 other properties worth €403 million
By the end of September 2020, €8.9 billion (29.6% of total loans) had been granted to households and secured against residential property. A further €8.5 billion (28.1% of total loans) had been granted to businesses and secured against commercial property.
The Central Bank explained that “the property sector has generally proved resilient to the effects of the pandemic to date. However, the transmission of the effects of the pandemic may be delayed and therefore the assessment of the vulnerabilities of the sector should be carefully and continuously monitored”.
It also noted “the pandemic and the subsequent fall in economic activity have had a negative impact on the property market and construction activity” and that “the cancellation of the Citizenship by Investment scheme is expected to lead to a further reduction in property prices.”
However, the pandemic has changed lending to the property sector, due to either reduced demand or the imposition of stricter lending criteria.
“Nevertheless, the fiscal support measures taken during the pandemic and incentives targeted to support domestic demand for property has prevented substantial falls in property prices” said the Central Bank.