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Real-estate downturn expected to continue

The largest overall price decreases were recorded in Nicosia

By Staff Reporter

DESPITE 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, according to the latest Cyprus Economy and Real Estate Forecast conducted by Leaf Research.

With regard 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, according to the report.

“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,” it added.

In the short term, the biggest challenge would be the prospect of development within the British Bases, as this would significantly increase the supply of available land in Larnaca and Limassol.

In 2013, the highest movement in total volume (31 per cent) and purchases by foreigners (38 per cent) were recorded in Paphos district, while 27 per cent of sale and purchase agreements across Cyprus involved foreign buyers.

The smallest number of sale and purchase agreements (241) was recorded in the Famagusta district (six per cent of the total), while the lowest percentage of transactions to foreigners was recorded in Nicosia (13 per cent of total transactions, or 92 properties).

Prices decreased across all cities and for all types of real estate. The largest decrease was recorded for shops (42 per cent decrease in relation to 2009 Q4) and the lowest for houses (26 per cent 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 report said.

“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,” said the report.

“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”.

Leaf says that prices are most likely to continue decreasing in the short term due to subdued demand but demand remains low mainly because unemployment remains high and is expected to increase further 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,” said the report.

The research suggests that in the medium term, the economy would face the ongoing challenge of the banks’ deleveraging and foreclosure of real estate assets, while in the long term there would 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”.

However, it said the forecasted economic stabilisation and GDP growth onwards from 2015 were unlikely to be enough to alter the general situation in the economy and the labour market any time soon.

And, even though there was an increase in income from tourism (+8 per cent in 2013), hotel owners were in a difficult position due to their levels of indebtedness, and have not invested in their hotels, lowering the standard of the product.

The research said the percentage of non-performing loans (NPLs) appeared to be stabilising, but remains at high levels which suggests there was likely to be a need for further recapitalisation of the banks in the foreseeable future.

In 2013 there was an annual decrease of 7.1 per cent in the total loans to households, with most household loans being housing loans (€11.8b) equalling 53 per cent of total loans outstanding. Total NPLs amounted to €24.1b, which equals 147 per cent of estimated 2013 GDP.

The majority of NPLs are recorded in the construction sector, amounting to €4.62b. As at year end, NPLs equalled 53 per cent for Bank of Cyprus and 47 per cent for Hellenic Bank. For the co-ops, as at 2013 Q3, NPLs equalled 47 per cent of their portfolio.

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