Time for a new investment strategy in Cyprus

All change - Time for a new investment strategy in Cyprus?

Property investment > investmen

Cyprus - and we're not including northern Cyprus here - has long been a place that has attracted foreign property buyers looking for a retirement or a holiday home in the sun.

Foreign, particularly British, buyers are attracted not just for the near year-round sun, good food and friendly locals but also:

· the island is very British, in fact the laws are based on English common law
· low taxes, including 0% inheritance tax and the ability to have your UK pension taxed at only 5%
· great mortgage finance, low interest rates, 30 year terms and 90% LTV

Up until around 2 - 3 years ago the Cypriot property market primarily attracted second home buyers. As well as these factors, investors were (and still are) attracted to the island by the restricted supply of property due to a shortage of land, a healthy resale market (by sunshine destination standards) and its increased political and economic stability brought about by EU membership.
The Cyprus property market has traditionally had a healthy balance between second home owners, locals and investors.

Changes on the horizon

Now there are signs that the Cypriot market is about to enter a new phase. Various large UK property agents have been actively looking for property in Cyprus recently.

Unfortunately, they are the kind of agents who make large commissions (often by pumping the prices up), have large marketing budgets and employ sharp salesmen. Each company plans to sell between 500 and 1000 properties a year. This will increase investor demand by 1,000's of off-plan (not resale) units per year over the next few years. This will have dramatic effects on prices and the way the Cypriot property market functions currently. Can developers supply this much new build property to satisfy this level of demand?

There is already a shortage of land for developers to build upon and it is predicted that zoned land will run out completely in around 5 years time, wherein only a resale market will exist, so the long term prospects are good. Furthermore, planning laws restrict the height and density of property than can be built in Cyprus further reducing supply and increasing prices as developers can't use the space they have available as efficiently to make the same margins. There has been around 16,000 units build per year over the last couple of years which has been about the right level for the demand. If we see a sudden increase in demand for off-plan property then agents will have to sell anything they can get their hands on (to reap those juicy commissions) and developers will naturally increase prices. Either way I think we will see prices increase (as demand is strong and supply finite), but along with the price rises it will become increasingly hard to rent out or resell your property in the short term.

If many of the big agents achieve their large sales goals they will be inclined to implement a rental solution for their clients. Whether this works or not, the result will be more competition for tenants, so good rental yields may become harder to obtain. While tourist numbers are increasing in Cyprus, the increase is unlikely to be enough to satisfy the supply, particularly for apartments which are harder to rent than villas. Now that cheap airlines have started flying to Larnaca , we can expect to see more independent travellers going to Cyprus. This trend of increasing tourist numbers will continue as the skies above Cyprus open up, though it will take a number of years to see significant increases as overall flights are still expensive to Cyprus, which has always been a limiting factor in the market.
Short term uncertainties

In the short term a number of effects are likely to be seen:

· Resales will become even more difficult due to over-supply as the primary demand is coming from off-plan

· Rentals will become much more difficult due to over-supply

· Prices will become inflated, due to agent over-pricing and developers not paving enough units to sell, which could lead to medium term instability if there is not enough new build product to satisfy demand

· Developers could be tempted to build more quickly and in less desirable areas so clients will have to be extra careful what they buy

· Some agents, who want to remain active in Cyprus, may be forced to sell resales as there is not enough off-plan, which would be a very positive influence - though this is unlikely in the short term

· Developers will offer less attractive terms as they have more choice and could sell to so many groups, so it becomes a sellers' market
Long term - bright outlook

In the longer term demand will continue to be strong, because of the factors in the first part of this article. Supply will slow down and eventually Cyprus will become primarily a resale market.

Capital Growth predictions

In the medium term we predict that capital growth will continue at between 15-25% a year, just as it is now (the exact figure depends on the area). Though we expect to see price inflation (this is different from real capital growth) of quite a bit more than this on certain developments as they get pumped up by commission hungry agents, so expect figures of over 30% being quoted. The trouble is you won't be able to sell at these inflated prices, so always discount by at least 10% for the resale market.
Possible strategies.

If you already own investment property in Cyprus then you have two main options:

1.Ride the wave for the next 6 to 12 months and sell early next year before the increased supply factors hit, thus cashing in on your gains

2. Hold for the long term (5-plus years), in which time new build prices could double. Those companies pumping and dumping off-plan property will have moved on, leaving, after some turbulence, a healthy resale market and improving rental market. In the short term rentals and resales may be more difficult, but if you can deal with this, the long term outlook is positive.

If you're looking to buy property in Cyprus right now as a holiday home, which you plan to hold for a number of years, then you can't go too far wrong. As a pure investment location I'd look to the cities such as Nicosia or further afield to Eastern Europe.
Overall, the Cyprus market is attractive to both investors and second home buyers, when compared to many other sun destinations. But there are choppy uncertain waters ahead that could send the market in who knows which direction.
If you are risk-averse, then plan to get out of the market over the next 6-12 months; or , if you want an exciting ride, then stay in the market and hang on to your hat. The long term gains could be very good indeed.