Executive Summary
- Following the banking crisis in 2013, in addition to a freeze on bank loans to the public and a decline in foreign investors, the real estate sector in Cyprus took a hard hit.
- These figures highlight the gap between the steady-state performance of the real estate sector, and the current underperformance because of the financial crisis.
- On average, foreign investors accounted for 30% of total sales in the past 20 years.
- Given that Cyprus has successfully completed its bailout program and came out of recession, and that interest rates have been dropping and lending has resumed, the real estate sector witnessed a strong recovery in the few years following the banking crisis of 2013, creating a unique opportunity for investors who entered the market relatively early on.
- In the past three to four years before the emergence of the COVID-19 crisis, sales to foreigners have bounced back reaching 47% and 45% from Total Sales in 2018 and 2019 respectively.
- The emergence of the COVID-19 black swan at the beginning of 2020 dealt a huge below to the Real Estate market in Cyprus, with sales dropping to a record low in April 2020.
- Sales followed a bumpy road during the multiple lockdowns after the sharp drop in April 2020, however they returned to pre-pandemic levels registering a growth of 285% on annual basis in April 2021.
Property Sales Overview
The real estate market in Cyprus enjoyed an exceptional decade from 2000 until 2008, when property sales averaged 16600 units per year, initially driven by domestic demand, however as Cyprus joined the European union in 2004, demand from foreign investors soared substantially to reach 53% from total sales in 2007, or an equivalent of 11281 units from a total of 21245.
The global financial crisis of 2008 put an abrupt end to this virtuous circle as international investors sustained substantial losses across all asset classes and were forced by the prevailing market conditions to enter risk-on mode. The deleverage was noticeable as the average sales to foreign buyers dropped from 40% in the 4 years before the financial crash to just 25% of total sales during 8 consecutive years from 2009 until 2016 (Exhibit 1).
Domestic sales experienced the worst decade of sales drops from 2004 until 2013, except for the year 2007 which saw sales increase by 16%. The local banking crisis of 2013 made things worse, sending domestic sales to plummet by 43%, the worst year on records; following the bailout program Cyprus signed with the Troika and the restructuring and recapitalization of the major local banks, domestic sales started to recover gradually, but never to reach pre-2009 levels.
Amidst an economic downturn that brought economic activity to a halt, unemployment shooting to record levels, the government envisaged an investment program aiming to attract wealthy foreign investors to give the so much needed boost to the economy through the re-invigoration of the Real Estate sector, which accounts for about 17% of GDP. This move was spot on and it helped restart the economic engine; indeed, the economy grew at a faster pace than expected during 17 consecutive quarters achieving an average growth rate above 3.5%, driven by increased activity in the Tourism, Real Estate and Retail Trade Sectors.
In the past three to four years before the emergence of the COVID-19 crisis in the first quarter of 2020, sales to foreigners have bounced back thanks to the introduction of the Government Investment Program in 2016, particularly due to interest from Russian, Eastern European, Chinese, and Arab investors. Sales to foreigners have doubled since 2014, and reached 47% and 45% from Total Sales in 2018 and 2019 respectively
The emergence of the COVID-19 black swan at the beginning of 2020 dealt a huge below to the Real Estate market in Cyprus, with sales dropping by 79.56% and 70.56% in April and May 2020. Sales activity recovered a little bit following the easing of the lockdown measures in the summer and even registered a spike of 30.87% in October 2020 after the government announced the termination of the Investment Program, mainly driven by increased number of last-minute applications before the 1st of November termination date. Ultimately, sales returned to pre-pandemic levels registering a growth of 285% on annual basis in April 2021 (Exhibit 2).
Property Sales by District
Coastal cities were the most affected by the decline in sales after the implementation of the first lockdown in spring 2020. The charts below highlight the differences in the magnitude and longevity of the declines between the major districts of Nicosia and Limassol. The highest number of sales was registered in December 2017, where 1537 units were sold. Sales to foreigners declined by a third at the end of 2020 registering -33.40% compared to December 2019.
Nicosia:
Nicosia saw the lowest declines in property sales in spring 2020, registering a decrease of -77.51% and -53.05% in April and May 2020 respectively; once the lockdown measures were lifted the sales took an upward trend until April 2021, except for the months of December and January. The sales growth in April 2021 reach 502.63% on annual basis. The highest number of sales was registered in December 2017, where 306 units were sold.
Limassol:
Property sales in Limassol started to decline well before the COVID-19 pandemic and registered 15 months of decrease from June 2019 until August 2020, with the months of April and May 2020 registering the lowest declines of -83.51% and -79.49% on annual basis respectively; it’s only in September and October that year that sales took an upward trend registering positive growth rates of 5.42% and 76.32%, driven mainly by last minute applications to enroll in the Cyprus Investment Program following the announcement of its termination on 01 of November. The sales growth reached 305.56% in April 2021 on annual basis, indicating a return to pre-pandemic levels. The highest number of sales was registered in May 2019, where 546 units were sold.
Paphos:
Property sales in Paphos started to decline well before the COVID-19 pandemic and registered 15 months of decrease from December 2019 until February 2021, with the months of April and May 2020 registering the lowest declines of -67.86% and -70.30% on annual basis respectively; this is mainly due to the reliance on foreign buyers who represented 71% of total sales on average during the last three years. It is only in March and April 2021 that growth returned to the Real Estate Market in Paphos, as international travel started to ease. The sales growth reached 80.56% in April 2021 on annual basis, the lowest across all districts and the return to pre-pandemic levels seems a bit distant. The highest number of sales was registered in May 2019, where 404 units were sold.
Larnaca:
Property sales in Larnaca started to decline just at the onset of the COVID-19 pandemic and saw an intermittent periods of growth and decline during the various lockdowns that have been enforced on the local economy, with the months of April and May 2020 registering the lowest declines of -82.86% and -65.90% on annual basis respectively; It is only in March and April 2021 that growth returned to the Real Estate Market in Larnaca, as international travel started to ease. The sales growth reached 462.50% in April 2021 on annual basis, the second highest across all districts and the return to pre-pandemic levels looks promising. The highest number of sales was registered in December 2017, where 181 units were sold.
Famagusta:
Property sales in Famagusta showed same trend like Nicosia during and after the first lockdown due the COVID-19 pandemic; indeed sharp decreases in the sales activity in the months of April and May 2020 have been registered with the lowest declines of -89.58% and -67.82% on annual basis respectively; sales growth returned immediately in June 2021 and lasted until April 2021, except for the two months of January and February 2021 when a second lockdown was imposed upon the economy . The sales growth reached 360.00% in April 2021 on annual basis, the third highest across all districts and the return to pre-pandemic levels looks around the corner. The highest number of sales was registered in December 2017, where 169 units were sold.
Property Sales to Foreigners
The Real Estate market in Cyprus is a major destination for International Investors, be it for a summer house or an investment for income generation. Indeed, in the last 20 years, foreigners accounted for more than 30% on average of total sales. This figure increased to more than 40% on average in the last three years. For example, in April 2020, foreigners bought more properties than residents, accounting for 57% of total sales, however this trend was reversed in April 2021 where the foreigners accounted for less than 30% of total sales, indicating a market which is driven by domestic buyers.
This picture is the same across all Districts, except for Larnaca where foreigners increased their share from 45.83% in April 2020 to 50.37% in April 2021, highlighting the strategic place of Larnaca as a favorite market for buyers with lower budgets. All of Nicosia, Limassol, Paphos and Famagusta saw foreign buyers’s share decline from 23.68%, 68.06%, 70.83% and 40% in April 2020 to 9.61%, 27.05%, 51.54% and 23.91 in April 2021 respectively, with Nicosia being the least attractive destination for foreign buyers and Paphos being the hot spot.
In terms of Market share by District, Limassol and Paphos took the lion share in April 2020 with 33.33% each, however this picture metamorphosed in April 2021 as more Domestic buyers acquired more properties in Nicosia, putting in second place behind Limassol with 35.10% and 27.52% respectively, while Paphos saw its share shrink to 15.63% as foreign buyers were kept at bay by the pandemic.
