Property Prices in Cyprus Set to Fall Further

Online, January 13, 2011 (Newswire.com) - This sunny island in the east Mediterranean, which enjoys great weather round the year, has long been popular with tourists and long-term foreign residents. Long, warm summers, short, balmy winters, clean beaches, charming villages, friendly, welcoming people, diverse historical and cultural associations, ancient archaeological ruins and a blend of Middle Eastern and Western European influence all combine to give Cyprus a very special appeal. While some of the resort towns offer a glitzy night life, those looking for peace and quiet can head to the villages along the coast or further inland.

A member of the EU since 2004, Cyprus has a good standard of living, a crime rate far lower than the European average, modern infrastructure, high-quality medical care and a relatively low cost of living, all of which have made it an attractive place to relocate or retire to. Cyprus has adopted the euro and buyers can avail of euro mortgages.

Over the last 10 years or so, healthy demand from overseas had fuelled growth in the real estate and construction industries, making them major contributors to economic development. However, the real estate boom that Cyprus enjoyed for over a decade finally ended in mid-2008 and prices have been falling ever since, though not as sharply as in Spain, Greece and some other countries hit by the recession. Currently, prices are continuing their downward trend due to weak demand from foreigners as well as locals, though foreign demand is presently much lower than domestic demand.

Demand has weakened largely because the number of buyers from the UK and overseas has dropped sharply ever since the recession. The sterling has lost value against the euro, making investments in the Eurozone more expensive for British nationals. Global economic uncertainty and falling real estate prices in many countries have made potential investors very cautious. Also, the Cypriot government's delay in issuing title deeds and the general lack of transparency in real estate transactions have discouraged British and Russian buyers who do not want to invest in property for which they might be unable to obtain a clear legal title as has been the case with some buyers in the past. The government is working towards amending property laws and regulating real estate transactions in order to encourage foreign investment. Mortgage rates in Cyprus are among the highest in the EU, making home loans too expensive for many and depleting demand further.

Weak demand, speculative construction, the influence of distressed Greek banks on the Cypriot banking industry as well as economic uncertainty in the UK, other European countries and in the US have led analysts to believe that prices will fall further before the real estate market bottoms out. According to a Central Bank bulletin released in December 2010, house prices dropped by 1.8% during the first three quarters of 2010. In 2009, prices had fallen by 4.1%.

The retirement and vacation home segment has been hit the hardest. Coastal towns that were popular with foreign buyers have seen sharper price falls than Nicosia and other places favoured by Cypriot buyers. Spain's boom-and-bust property market and falling prices elsewhere are prompting potential holiday and retirement home buyers to be careful about where they invest, many of whom are beginning to look at Turkey, Bulgaria and Croatia as alternative destinations.
Cypriot banks have become more prudent about approving loans to foreigners looking to buy property in Cyprus. Apart from increasing collateral requirements, banks have also changed the terms of payment. Property investments in coastal areas are being viewed as more risky because the sharpest corrections have occurred there. All these factors make home loans harder to come by.

In Paphos and Sotira, both of which have been particularly popular with foreigners, prices have fallen as much as 20% to 30% over the past two and a half years. In Protaras and the areas west of Larnaca such as Pervolia, Kiti and Tersefanou, prices have not fallen as much. The reason is these places are popular with local buyers. Nicosia, which has seen an increase in sales, has fared better than other towns and cities.
The economy is expected to do slightly better in 2011. Analysts hope that the discovery of oil in the seabed areas will give the Cypriot economy a boost. Though Cypriot banks are fairly stable, there is some concern about the increase in non-performing loans and the exposure to Greek banks. The country's high fiscal deficit also needs to be reined in.

Real estate recovery depends significantly on an increase in foreign investment, which in turn hinges on economic stability and growth in Cyprus and overseas as well as amendments to fiscal, property and tax laws in Cyprus.
Cyprus is still a wonderful place to live. It might be a good idea for those who want a home in Cyprus to watch the market closely and wait for prices to correct further before buying. However, risks remain and potential investors are advised to proceed with caution and with reliable legal advice.

Points to consider about property transactions:
• It's recommended that prior to buying property, a potential buyer clarifies that the land is free of encumbrances and a clear title deed can be issued to him.
• One should always deal with a registered agent because he is bound by a national code of conduct. Non-registered agents do not have the legal authority to broker property deals.
• It's prudent to consult a reputed, independent lawyer for guidance because real estate transactions in Cyprus are not yet standardised.
• Fees and taxes, which include stamp duty, transfer fees, VAT, application fee for permission from the Council of Ministers, legal fees, surveyor's fees as well as mortgage fees and foreign exchange conversion costs if applicable, amount to approximately 6 to 7 percent of the sale price.
• Permission to purchase property in Cyprus must be obtained from the Council of Ministers.