The CEO of Ask WiRE, a Cyprus fintech company, Pavlos Loizou, indicated in an analysis examining the landscape of the domestic real estate market in the coming year, that, thanks to strong demand and a robust economy, residential property prices will probably hold stable from the previous year.
Loizou reviewed some of the major world events that have an impact on prices, such as the gradual recovery of the European and Cypriot economies by the end of 2021 following the Covid-19 pandemic and the negative consequences of the subsequent actions, such as the lockdowns. In addition, he pointed out that inflation was gradually rising even though the stock market at the time was at record highs.
The worldwide container freight index is down 74%, from $9,304 to $2,404, the stock market's S&P 500 is down 19.5%, from 4,750 to 3,800, and inflation appears to have peaked at around 8–9%, according to Loizou, who also noted that supply chain disruptions were less severe a year later.
"The war in Ukraine and the related geopolitical changes, the EU’s quick transition away from Russia as its primary energy supplier, and the rise in interest rates have all resulted in (and are still resulting in) a significant repricing of risk across asset classes, particularly those that are highly leveraged, such as real estate," Loizou said.
He continued, "This repricing will continue in 2023, especially as other investment opportunities increasingly appear to be more appealing."
In order to analyze the situation in Cyprus, Loizou's analysis first created an evaluation framework.
"Higher disposable income, population expansion, more lenient lending requirements, and lower interest rates all serve to increase home values," he said.
Furthermore, he said that, similar to residential real estate, the price of commercial property tends to rise in conjunction with GDP expansion and decline in the event that interest rates and returns on other assets are higher.
The dynamics of real estate prices, in both the residential and commercial real estate sectors, are influenced by foreign investors, he claimed.
The CEO of Ask Wire further on these 2023 driving reasons by saying that disposable income is projected to have decreased due to skyrocketing costs, significant inflation, and the increase in interest rates.
Additionally, banks have tightened their lending standards for all kinds of real estate, and interest rates on mortgages, investments, and construction have been rising.
Loizou noted that "the influx of overseas investors, particularly from Lebanon and Israel, is also causing prices to rise for certain property types," something that primarily affects small residential units and tourist establishments in Larnaca. "On the other hand, population has increased significantly due to arrivals from Ukraine, Russian, Belarus, and other countries causing a spike in residential rents and prices in certain areas," Loizou said.
According to Loizou, while the GDP of Cyprus continues to grow in terms of commercial real estate, investing in real estate for income return or capital appreciation has become less enticing due to increased interest rates and returns on other assets.
For instance, he noted, "the yield on the 10-year bond of the Cyprus government is currently at 4.2 per cent and banks across Greece and Cyprus are issuing preferred and Tier 2 bonds offering 7.0-10.0 per cent coupons."
"The above indicates that the main drivers of growth in the local real estate market are likely to be population growth, inbound investment from overseas, and sticky supply, since it takes 2-4 years to add meaningful levels of stock)," he continued, with decreasing disposable income and higher interest rates acting as inhibitors.
Due to the aforementioned, Loizou argued that it would be logical to predict that the market will divide into two distinct tiers, with some real estate targeted at domestic buyers and others at overseas investors.
If foreign investors and buyers will continue to support the current range of prices over the long term is one of the variables in this situation, according to Loizou.
According to Loizou, "the likely answer is yes, as the local business environment and political stability, given what is happening in the region, and the ‘work from anywhere’ way of doing business are playing to Cyprus’ favour."
Loizou emphasized that the previously noted "sticky supply" was to blame for prices increasing, but added that this was "likely to change over the medium term as more projects are announced, especially in West Limassol and part of Larnaca."
The supply of residential properties is still at or near record lows, he continued, and new home development has not fully recovered since the 2008 housing collapse and the 2013 banking crisis.
According to Loizou, "this tight inventory has made homes unaffordable for many, particularly first-time homebuyers."
Additionally, he continued, "those who purchased homes in recent years at extremely low mortgage rates are staying put, further limiting the overall housing supply."
Additionally, he pointed out that the population growth over the previous ten years has had a significant negative impact on the demand side for a variety of reasons.
"We do not expect that the housing market in Cyprus will see a significant correction, as the economy remains strong and demand for housing is still relatively high. In fact, low supply and strong demand mean that it is unlikely that home prices will drop significantly in the near future," according to Loizou.
"However, the potential for a slower pace of home price growth and declining sales in the coming year could make it easier for would-be buyers to access affordable housing. We are less positive on commercial real estate, where the range of alternative investment opportunities has increased significantly over the past year," he continued.
In the short to medium term, Loizou said, "combined with rising interest rates, is likely to cause repricing, particularly on smaller units and dated properties."
By fLEXI tEAM