Residential real estate prices in Cyprus continue to tumble as the country struggles with rampant real estate fraud in the midst of an economic catastrophe. Cyprus has been forced to make drastic spending cuts in order to obtain a bailout from the International Monetary Fund and unemployment has soared, leaving the real estate market and commerce in general in turmoil. The Cyprian government has passed laws allowing illegally developed buildings to receive legal title deeds. Meanwhile, legal deeds are being withheld during legitimate transfers, causing chaos in the housing market. For more on this continue reading the following article from Global Property Guide.
The average house price in Cyprus dropped by 5.7% in 2012 to €384,316, according to the Royal Institution of Chartered Surveyors (RICS-Cyprus). We are now, in 2013, into the fifth year of house price declines in Cyprus. And things recently took a dramatic turn for the worse.
When adjusted for inflation, nationwide house prices dropped by 6.9%. On a quarterly basis, house prices in Cyprus fell by 1.1% (-2.2% inflation-adjusted) in the latest quarter for which statistics are available, Q4 2012.
- Limassol saw the biggest annual house price falls of 10.7% (-11.9% inflation-adjusted), to an average price of €363,277
- In Nicosia, the capital, house prices fell by 4% (-5.3% inflation-adjusted), to an average of €475,409.
- In Larnaca, the average house price also dropped by 7.9% (-9.1% inflation-adjusted) to €331,695
- In Paphos, house prices dropped 4.6% (-5.9% inflation-adjusted) to an average of €390,513
- In Famagusta-Paralimni, the average price of houses fell 1.2% (-2.6% inflation-adjusted) to €360,686
Limassol had the biggest drop in apartment prices among Cyprus districts, falling by 15.5% (-16.6% inflation-adjusted), followed by Famagusta-Paralimni (-10.5%), Nicosia (-5.1%), Larnaca (-4.9%) and Paphos (-3.2%).
After robust year-on-year house price increases increases of by 21.09% (17.03% inflation-adjusted) in 2007 and 9.26% (5.48% inflation-adjusted) in 2008, Cyprus’ housing market started to decline in 2009, mainly due to the global financial meltdown.
- In 2009, the residential property price index fell by 2.19% (-3.03% inflation-adjusted) from a year earlier, according to the Central Bank of Cyprus.
- In 2010, the residential property price index dropped by another 3.89% (-5.83% inflation-adjusted) from the previous year.
- In 2011, the residential property price index fell 5.67% (-8.93% inflation-adjusted) from 2010.
Property demand is falling. In April 2013, the total number of property sales in the country plunged 38%. to 285 contracts, compared to the same period last year, according to the Department of Lands and Surveys. Of the total, 59% were domestic buyers while the remaining 41% were overseas buyers. Domestic sales fell in all districts.
During the first four months of 2013, the total number of tourist arrivals in Cyprus fell by 12.2% compared to the same period last year, according to the Central Bank of Cyprus.
Total housing loans dropped by 5.8% to about €14.2 billion in May 2013 from the same period last year, according to the Central Bank of Cyprus.
The housing market slump is likely to continue. The economy is projected to suffer a double-digit contraction this year.
Housing market scandals
Property scandals have hit epidemic proportions in Cyprus, involving fraudulent transfers of property, the deliberate withholding of Title Deeds, and an across-the-board amnesty for development projects of dubious legality.
Title Deeds (or "Certificates of Registration of Immovable Property") are legal documents all property owners in Cyprus are required to possess. Many buyers dispensed with them in order to avoid the payment of Property Transfer Fees which, as of May 2012, is calculated as follows:
|3%||on the first €85,430|
|5%||on the next €85,430|
|8%||on the remainder|
Source: Cyprus Property Law
Claim up to $26,000 per W2 Employee
The difficulties involved with not having a Title Deed, however, are myriad. Technically one does not own the property, despite having paid for it in full. The legal owner (the one who actually holds the Title Deed) retains the right to mortgage the property without the consent of the buyer. If the land was already mortgaged before it was sold, the legal owner can extend or increase the mortgage without consent.
Around 40,170 foreign buyers’ properties were caught in this Title Deed trap by the end of November 2011, according to the Department of Lands and Surveys. Out of 51,654 properties purchased by non-Cypriots from year 2000 to November 2011, title deeds have been transferred on only 11,484, and the gap between the number of properties sold to foreigners and Title Deed figures continues to widen.
The most insidious problem is unscrupulous property developers extorting money and claiming it as payment for "immovable property tax". This has attracted the attention of the European Union, spurred by a rising number of complaints from overseas buyers frustrated with a lack of consumer protection from developers who sell property without the proper permits and permissions—or, in one well-documented case, sell the same property twice.
The Town Planning Amnesty law
The government passed a “Town Planning Amnesty” law in April 2011, allowing illegally built properties and properties suffering from planning infringements to apply for Title Deeds. This was actually four bills to increase consumer protection.
The new planning amnesty laws:
- Require the developer to move towards securing Title Deeds for his customers and carry out necessary things to ensure the Deeds issuance in a timely manner.
- If a property has been completed to specification and has no planning irregularities, the project architect may file plans for a division.
- Major planning irregularities should be corrected, if there are any.
- The buyer or developer can submit a form of intent to go through the “planning amnesty” process if there are minor planning irregularities by October 8, 2011.
- Providing that any planning infringements fall within the scope of the amnesty provisions, the applicant will be able to apply for a ‘Certificate of Final Approval’ – necessary in the process of Title Deeds issuance
- Depending on the nature and extent of any infringements, a fine may be payable.
- If there is a major planning infringement, it will result to an issuance of a Title Deed containing a statement about the offending part of the property. Depending on its severity, the statement may allow its sale as long as certain conditions are met, or worse, prevent the sale of the property.
Included in the planning amnesty is an immovable property sales law, which effectively gives the property owner a land contract, and removes his liability for the developer’s bad debts.
The government has also reduced VAT for first-time buyers, cutting VAT on homes up to 275 sq. m. to 5%, from the previous 15%.
Natural gas discovery
In December 2011 a gas field was discovered off the coast of Cyprus by Noble Energy Inc., involving 5-8 trillion cubic feet of natural gas in a field covering 40 square miles. The gas find was dubbed as “historic” by Cyprus President Demetris Christofias, and is worth tens of billions. It could provide the Island with electricity for 210 years according to Commerce Minister Praxoulla Antoniadou. Shortly after the discovery, Noble Energy announced plans to build a gas terminal in Cyprus.
Turkey has however already announced that it wants its share of the gas deposits. In September 2011, Turkish Prime Minister Tayyip Erdogan demanded that Cyprus postpone offshore drilling, and warned that he would send warships. Yet despite the possibility of conflict, the Government of Cyprus remains committed to the project. “Cyprus is in a position to strengthen the energy security of the EU as we are the only country in the region [with gas] that belongs to the EU,” said Antoniadou.
Low rental yields
Rental yields in Cyprus are low, compared to yields overseas, according to RICS-Cyprus. Average gross rental yields in Q4 2011 were around 3.8% for apartments, and 2% for houses. This parallels Global Property Guide research of January 2011, which found yields ranging from 2.7% to 4.6%. Larnaca has the highest yields, ranging from 4.54% to 4.76%.
Costs of buying a 120 square metre (sq. m.) apartment in Cyprus:
- Nicosia: average price: €1,646/ sq. m. Rental yield: 4.35%.
- Limassol: average price €2,140/ sq. m. Rental yield: 4.10%.
- Paphos: average price €1,780/ sq. m. Rental yield 2.71%.
- Larnaca: average price €1,330/sq. m. Rental yield 4.54%.
Tight credit market
Tighter credit standards were implemented by Cypriot banks during the first quarter of 2012 as a precautionary measure. In February 2012, the average lending rate for loans up to 1 year increased to 6.76%. The interest rate for loans from over 1 and up to 5 years was raised to 7%, and to 5.14% for loans over 5 years.
Variable-rate mortgages account for 97.8% of all housing loans in Cyprus, making the market vulnerable to interest rate shocks.
Cyprus’ interest rates are now among Euro area’s highest, and are relatively high In comparison to ECB rates (see chart below). Banks in Cyprus have been slow to respond to ECB interest rate cuts, and there is a big margin between the Central Bank key rate and their interest rates. That is because there is little inter-bank lending, so banks rely on customer deposits for funding. Many banks pay high rates to attract deposits, according to finance minister Makis Keravnos.
The adoption of the Euro in January 2008 led to a significant change in the method of calculating interest rates (from May 2008), and the data are now harmonized to the European Central Bank’s requirements.
Mortgage loans have grown significantly from 7% of GDP in 2005, to 62% of GDP in 2009. However, growth slowed down in 2010 and 2011, with 64% and 63% of GDP, respectively.
Economic woes continue in 2013
To secure a €10 billion EU-IMF rescue package, Cyprus has cut public sector spending, hiked taxes, and cut its bloated banking sector. Also included in the agreement was a write-down of bank deposits of more than €100,000 at the country’s two largest banks—Bank of Cyprus Plc and Cyprus Popular Bank.
In May 2013, unemployment reached 16.3%, an amazing increase on the 4% average unemployment rate from 2000 to 2009. Unemployment was up 30% in May 2013 from the same period last year, to 44,424, one of the highest year-on-year increases in the EU.
The University of Cyprus-Economic Research Centre expects the economy to decline by between 9% to 12% in 2013, while the European Commission projects it to contract by 8.9%, as a result of tough austerity measures. In 2012, real GDP contracted by 2.4% from a year earlier, after annual growth rates of 0.5% in 2011 and 1.3% in 2010, and an annual contraction of 1.9% in 2009.
Because of the country’s banking crisis, credit rating agencies recently downgraded Cyprus.
- Standard & Poor’s downgraded the country’s credit rating to SD (selective default) from CCC.
- Fitch downgraded Cyprus’ local-currency issuer rating to CCC from B.
- Moody’s retained its credit rating of Caa3 with a negative outlook for Cyprus, noting that the country risks another default in the coming years.
“Cyprus has no flexibility to deal with domestic or external shocks and there is a high risk of the program going off track, with financing buffers potentially insufficient to absorb material fiscal and economic slippage,” Fitch said.
This article was republished with permission from Global Property Guide.