THIS new economic situation has had numerous side effects and even we, perhaps the oldest valuation firm in Cyprus, are wondering what next.

In times of recession, there is a drop in demand and a consequential reduction in property values. In countries such as the US, the housing market has shown a drop of 40% in terms of real estate values, the UK up to 30%, Greece 40% and in Spain’s tourist areas 40%.

What is interesting is that these price reductions attract offers from interested buyers. However, in Cyprus the situation is quite different and adds to the whole confusion.

Property prices in Cyprus have now reached a maximum reduction of +-30% in the tourist areas, whereas in residential areas (i.e. where demand is forthcoming primarily from locals) the drop is around 20%. This is a relatively low reduction, bearing in mind that foreign demand has fallen by 70% and local demand by 50% as one would have expected price reductions around these percentages.

property prices are reduced at a lower percentage than demand

Having said that and if, for example, a Cypriot seller cuts 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 few buyers. This is, perhaps, due to the fact that local banks (so far at least) have not been as aggressive in debt collection as their counterparts in other countries.

Property owners (so far) have been able to “stick it out” and forced sales of mortgages take years to materialise.

So in this situation what is the value of a property? Should we expect prices to fall to levels of 50% plus? Is this perhaps today’s correct property prices? What a scary situation, we must say, since whereas the year 2010 has shown signs of a slight recovery in the first six months, the last three months have shown a fall in interest in comparison to 2009.

If this 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.

Another reason is perhaps the stubbornness of locals to grasp a situation not experienced in 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 afterwards. There is an economist’s 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 as collateral in order to get loans, will be worth next to nothing etc, etc.

For 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 billion 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 banks show patience in order to give some breathing space to the market to correct itself without huge losses and human misery. The theory is one thing and practice, with its repercussions, is another.

delays in loan repayments are charged by local banks with a 12% interest

What we are very much worried about, is that delays in loan repayments are charged by local banks with a 12% interest (thus helping those in trouble to go under at a faster rate) whereas a recent Cyprus High Court decision (and a decision by the Court of Appeal in the UK) vindicates the banks actions as being part of the contract to grant a loan (the UK case referred to interest charge of 22%!!).

we have the problem of no title deeds

To rub salt into 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 foreign demand in some cases – for example, the recent (2009/2010) sales for holiday home/apartment acquisitions in the Paphos and Paralimni areas.

So ending this, otherwise most depressing article, dear readers, is there hope in the near (11/2-21/2 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 civil war in Lebanon, the ex-Yugoslavia war, the Russian era of reform etc.

The recent visit by the President of Russia is one positive sign with Cyprus getting off the Russian black list, the Qatar deal is another, as is the Kuwait interest in 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!!!

Editors notes

I am grateful to Antonis Loizou FRICS, the Managing partner of Antonis Loizou & Associates Limited for allowing me to publish his articles.