There is a lot of discussion going on regarding Cyprus’ joining the Euro (as at 1.1.2008) and the side effects that this will have on real estate in Cyprus.

• The first effect is that borrowing will become less expensive. The prevailing libor (Cy) rate of 4½% will become (Euro) 4%. Despite the fact that there is the expectation of increase of the Euro base rate, the difference is quite large and it is not expected that the Euro rate will reach shortly the 4½%. This will in turn encourage funds/individuals to increase demand for real estate, with “positive effects on property values.

• The deposit rate will be also reduced from the maximum 4.20% (Cy) to 3.70% (Euro) encouraging even further real estate investment and acquisitions. Considering that land shows a capital growth in Cyprus of around 10%-15% p.a. and buildings of around 5%-10% p.a., it will encourage spare cash holders to turn their interest more eagerly towards real estate. It will also discourage to an extent those who are in two minds, whether to buy or rent, especially bearing in mind that rental income is around 3%-5% on real estate value (there is a wide fluctuation depending on type and location of property).

• It will reduce delays and money charges regarding transferring of funds from the Euro zone, encouraging further real estate investment by the reduction of costs/speed.

• Potential purchasers (foreign) will be ale to compare more easily Cyprus with other competitive countries, such as Spain, Portugal etc, with respect to its competitors in the Euro zone, making the decision easier, something again which might help the Cyprus market.

• Having a single currency relating to exchange rate vis-à-vis money sent from abroad and money received in Cyprus (pensions etc), which often causes exchange rate problems, will not exist.

So despite the other negative effects expected to come especially in perishable goods (as it has been the experience of other countries in similar situations) the Euro is welcomed always in terms of real estate. The positive effects in the real estate market must not be overestimated however. Bearing in mind that the main market of foreign demand is the British market and to a lesser extent the Russians, the possible effects will be limited.

A point to be considered is the often fluctuation of the interest rate, which appears more often in the Eurozone, as opposed to Cyprus. The fluctuating rates, especially now with the inflationary pressures caused by oil prices, will add an uncertainty to the buyers, who will consider more carefully their finances. The same, of course, goes for the developers, who need security of costs and we might find some extra cost added due to the higher risks involved by the developers in terms of borrowing costs.

What we will find, especially for Cyprus, is the increasing competition from the Cypriot banks, who will now have available millions of pounds deposited in offshore/external accounts and which they are now not allowed to lend in Cyprus. These extra millions will be available from local banks to lend, increasing, thus, cash availability and hopefully reducing the bank charges. So we will have to wait and see, what the effects will be, but the situation is far from clear as to the side effects on the Cyprus real estate market. But it is more certain than not, that the Eurozone will help, to an extent, towards increasing demand for real estate, the effects of which we will be soon known.

www.aloizou.com.cy

www.aloizou.com.cy/auctions

www.aloizou.ro

ala-HQ@aloizou.com.cy