on-going economic turmoil has now began to affect the real economy. The
unemployment rate increased to 5.6% in August, an increase of 0.2% compared to
July and of 2.1% on the year. Whilst unemployment in Cyprus remains at
comparatively low levels to the EU, where unemployment stands at 9.6% or 15.2
million people, it is now increasing at a faster rate than the rest of Europe.
● Over the first eight months of 2009, income from tourism fell
to €234.8m from €278m in
2008. The reasons for this decrease are a reduction in tourist
arrivals over the period by 11.1%, a drop in spending per head from €847 to
€805, and a shortening of the period of stay from 11.4 to 11.2 days.
● The Inland Revenue announced that compared to last year there is a decrease in
the government’s revenue of €190m from direct taxation and of €166m from
indirect taxes. The reduction is mainly attributed to the lack of real estate
transactions, as capital gains tax from real estate decreased from €246.9m by
80.4% to €48m (i.e. by €198.6m).
● The International Monetary Fund (IMF) announced a downward review of key
indicators for the Cypriot economy, in contrast to its upwards review of the
global economy. The IMF expects the economy to shrink by 0.5% in 2009, and to
grow by 0.8% in 2010. The current account deficit is expected to reach 10% this
year and 9.8% in 2010, and the unemployment rate 5.6% this year and 5.9% in
Cyprus Property Market
● Over the past
three months we have seen increased activity in the property market, with a
number of acquisitions from mainly Cypriots and some overseas buyers. The
majority of purchasers are attracted by reduced prices for holiday homes and a
sense of “easing” of the doom and gloom. The transaction volume for 2009 is
expected to be 50% lower than for any of the years during 2000-2008.
Whilst things are not positive in terms of transaction volume, the three month
average is showing an upward trend probably indicating that the worse is behind
● During the first month of autumn banks were busy promoting retail loans, but
bankers say that the market is still far from healthy. Mainly driven by the
state of the economy and of the job market, clients are still reluctant to take
out loans and banks are much more careful in scrutinising applicants and have
increased their due diligence.
● Along with the marketing of their new mortgage packages, the average lending
interest rate has decreased to 5.53% compared to 5.81% in July and 6.4% in last
August. Since February when interest rates reached their peak, at 7.06%,
interest rates have fallen by 1.53%. This reduction shows that Cyprus is
following the fluctuations in rates taking place across Europe with a marked
delay of 6-9 months.
● Dolphin Capital Investors, the largest AIM-listed property company, suffered a
34% drop in net asset value in the first half of the year. In Cyprus, Dolphin
has two large-scale, leisure-integrated residential resorts and more than 60
smaller holiday home projects through Aristo Developers.
● Moving forward we expect the property market to deteriorate further as
developers are pushed harder by banks and defaulting buyers (for whom the
developer acted as guarantor of their loan). In the medium term, we expect
prices to slowly recover as the lack of stock (there are few projects starting
and stock is being reduced) and a balancing of the economy begins to drive
land values in Cyprus
obvious to some, but confusing to others, when a valuer says that
“the value of
land is derived from the price of the end product”.
What this means is that the value of land is the difference between how much a
developer can sell the end product for, e.g. house, apartment, office, etc and
the cost of construction and their profit.
falling across all sectors, land values remain stubbornly high especially
compared to those in other countries. The reason for this resilience lays in
that Cypriots tend to have inherited the land and hence are not pushed to sell
it, and that few are willing to “cement”
any losses they have made on a past investment, i.e. in accounting terms to
realise their loss.
Whilst this may
appear innocuous, the effect is that there are no, or few, transactions taking
place as the market is not allowed to “find their
market clearance price”,
i.e. for transactions to take place at a price where demand equals supply.
Whilst this persists, there will be few transactions taking place in the short
term and this may persist in the medium term until the pricing of the end
product rises again so that it becomes profitable to buy land at this
● UK house
prices rose by 1.6% in August according to the Nationwide Building Society or
by 0.8% according to Halifax. The difference, as well as the ongoing murky
picture in the UK housing market, is a direct result of the small sample size
of data (there are very few transactions) and by the presence of forced sales
and cash buyers that confuse the picture even further.
● The number of mortgages approved for house purchase in the UK fell in August
for the first time in 10 months, in a sign of the continued fragility of the
property market. The figure had been climbing since November last year.
● In Greece, loan approvals fell by 17.1% and housing prices by 5%-25%
depending on the particular location of each property. Units most affected are
those over 100sqm and those that are up for rental, as the reduction in sale
activity has led developers to rent their unsold properties, resulting in an
increase in supply.
● The economies of Eastern Europe continue to struggle after the collapse of
inward foreign investment. Fitch, the credit rating company, warned that
Poland, Hungary and the Czech Republic risk being downgraded due to the
increase in their government deficit. In the Czech Republic the government
deficit is expected to increase from 1.4% in 2008, to 6% in 2009 and 2010.
● In Romania, the slowdown in market activity continued to affect the
construction sector. Over the past year, as a result of the steep decline in
sales of homes, projects totalling more than 10,000 units in Bucharest have
been frozen, while developers that had not begun construction works postponed
● Trouble may lay ahead for European banks as the World bank warned that in
contrast to their US and UK counterparts, European banks have another 50% of
their loses to write down. Also the OECD stated that European governments are
likely to carry out strict “stress tests” in the banking sector to identify
Cost of Debt
||One year ago
||One year ago