This, new for us economic situation, has had numerous side effects, which even us, who are the largest and perhaps the oldest valuation firm in Cyprus, are wondering what next.
In recessionary situations, there is a reduction in demand and a consequential reduction in property values. In countries such as the U.S., the housing market has shown a drop of 40% in terms of real estate values, the U.K. up to 30%, Greece 40% and Spain for the touristic areas 40%. What is interesting however, is that these price reductions meet offers by interested buyers. In Cyprus the situation is quite different however, adding to the whole confusion. Property prices in Cyprus have now reached as a maximum reduction of ±30% and that refers to property in the touristic areas, whereas the residential ones (i.e. where demand is forthcoming primarily from locals) around 20%. This is a relatively low reduction bearing in mind that foreign demand has reduced by 70% and local by 50%, since one would expect price reductions around these percentages.
Having said that and if for example a Cypriot seller reduces the price by 30%, will he find a buyer? The answer is most likely not, at least for the vast majority. So we have the paradox, that property prices are reduced at a lower percentage than demand, whereas at the same time, there are no/very little buyers. This is, perhaps, due to the fact that local Banks (so far at least) have not been as aggressive in debt collection as Banks in other countries, property owners (so far at least) have been able to “stick it out” and forced sales of mortgages take years to materialize. So in this situation what is the value of a property, since there is now demand? Should we expect prices to be reduced to levels of 50% plus? Is this perhaps the today’s correct property prices? What a scary situation, we must say, since whereas the year 2010 has shown signs of a slight recovery, for the first 6 months, the last 3 months have shown a reduction of interest by comparison to the year 2009. If this demand trend continues, perhaps we may see larger discounts/property price reductions. Yet we still see new projects under development, especially in the local demand areas and we attribute this (not certain) to prior commitment of developers, who are under contractual obligations to carry out part exchange projects and another reason, is perhaps the stubbornness of locals to appreciate the situation which has not been experienced over the last 50 years in the real estate market.
There is a school of thought that the only way to recovery is to leave prices to go down as much as possible and wait for the market correction afterward. There is an economist logic in this, but, then, what misery will this approach cause? People will stand to lose their homes and have a shortfall in addition, security value for business people who usually place real estate for mortgage in order to get loans, will worth next to nothing etc etc. For the non performing loans, at the end, the shortfall of the banks will cause them to have huge provisions for recoveries affecting their profitability and security value, increasing their financial future risk. If this happens will foreign investors and depositors (€50 bil. from Russia) trust the local banks (?) and if this happens, will the Government step in to help and with what cash during a crisis? Will Cyprus become another Ireland, Portugal or God forbid Greece? For these reasons we do not share this “cruel” thought (notwithstanding that the Governor of the Central Bank goes the other way), but on the contrary we suggest an exercise of patience by the Banks, in order to give some breathing space to the market to correct itself without relating huge losses and human misery to all. The theory is one thing and practice with its consequential affects is another.
What we are very much worried about, is that delays in loan repayments are charged by local Banks with a 12% interest (thus helping the needy to go under at a faster rate) whereas a recent Cyprus High Court decision (and a decision by the Court of Appeal in the U.K.) justifies the Banks to do so, being part of the contract to grand a loan (the U.K. case referred to interest charge of 22%!!).
In order to add salt on the wound, we have the problem of no title deeds, which even if one offers the property at a discount of say 35%, with the bad publicity that the non titles owning people have, the buyers will not touch them (in some respects quite unjustifiably we must say). So at the end of the day, what is your property worth – nothing or next to nothing?
Not necessarily, since we have noted that locals are quite happy to step into the shoes of the foreign demand in some cases. See recent (2009/2010) sales for holiday home/apartment acquisitions in the Pafos area and that of the Paralimni region.
So and in ending this, otherwise most depressing article, dear readers, there is hope in the near (1½-2½ years) future? (see our previous article on Cyprus attracting Millionaires etc). This is a “God protected” country, we think, since during difficult times, something else happens in the world (mostly misfortunes) which helps us. See the Lebanon civil war, the ex-Yugoslavia war, the Russian era of Metamorphosis etc.
The recent visit by the President of Russia is one positive sign with Cyprus getting off the Russians black list, the Qatar deal is another, as is the Kuwait interest on the gas terminal. At the end and we hope it comes soon, if we find gas/oil in the Cyprus sea economic zone, it will help us most (see what happened in Scotland and Norway). Shall we then seek God’s help to help us in a most difficult situation? Going to church, we say, more often, might help!!!