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Without Devaluation will Property Prices Collapse?

Editorial
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The President and Central Bank have ruled out devaluation ahead of joining the euro zone. What else could they say? Every devaluation in history has been preceded by such denials. The more denials necessary, the more likely the event.

Your correspondent Roger Greenwood has admirably stated the pros and cons of devaluation in your columns. It is a very difficult and unenviable decision, given the scale of the property bubble and the very real dilemma this presents to the Central Bank. If the Central Bank curbs property appreciation using interest rates, it could boost an already overvalued currency; but if it does nothing it runs the risk of a catastrophic property bubble collapsing, which would make the recent stock market collapse seem like a non event. It could even collapse the indigenous banks as an equivalent bubble did in Thailand in 1998.

Over the last eight years, there has been a worldwide property boom. This happens cyclically whenever there is excess liquidity within the banking system. Worldwide, the cycle is now heading downwards fast. In parts of the USA, house and real estate prices are down by between 30 and 40 per cent; with very few exceptions worldwide, property prices are heading downwards fast. Is it realistic to expect that Cyprus will somehow, magically, buck the worldwide trend? It might if property sellers become more realistic in their expectations and voluntarily revise their prices downwards to create a soft landing.

The real estate boom has been much more spectacular in Cyprus than elsewhere – worldwide only backward economies such as Lesotho and lesser developed ones such as Bulgaria have seen percentage house price appreciation greater than Cyprus. Not a good sign if you think about it as it means that Cyprus is relatively massively overpriced. Economists compare relative housing costs in different countries by means of the purchasing power parity equivalent (PPPE) which measures what like homes and local amenities cost in different parts of the world.

In 1999, in comparison with most of the Mediterranean, Cyprus was already overpriced on the back of an influx of Middle Eastern and Russian money. Since then, prices have bubbled to the point where not only is housing unaffordable to the local population but also to the point where any foreigner can get better bargains elsewhere in Europe and the Mediterranean.

The greater the bubble, the greater the subsequent collapse.

Cypriot central bankers will be particularly mindful of what happened in Thailand in that the local economy mirrors to some extent Thailand before the stock market plunged by 80 per cent, property by 70 per cent, the currency by 40 per cent and the indigenous banks collapsed. The economic similarities are frightening, particularly in the proportion of fixed capital investment as a percentage of GDP devoted to non-productive assets, such as property. Having watched a banking system irresponsibly fuel a stock market bubble, landing itself with many non-performing loans, the Central Bank can be only too well aware that a property collapse on any great scale could collapse the indigenous banks. If Cyprus can enter the euro next year, saving the local banks will become a problem for the much larger European Central Bank.

The government has very real difficulties to address. If it enters the euro at its present value, the country will be uncompetitive and local wages and the standard of living of the majority will have to pay the price to restore competitiveness. The alternative of devaluation is not sure fire, even if the tourist and export opportunities it presents are seized.

There is never an ideal time for devaluation, but now with the US dollar and oil prices falling is as good as it gets.

Fifteen per cent devaluation – a brave government would contemplate 30 per cent – as well as aiding competitiveness will reduce the scale of any property price collapse from the really frightening to the more manageable. If you believe that Cyprus will not buck the worldwide property collapse, one of the most powerful political arguments in favour of devaluation is that it could contribute significantly to safeguarding against a banking crisis.

F.Hunter
Limassol

Copyright © Cyprus Mail 2007

Golf Courses Told to Get Their Own Water

Editorial
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Permits for golf courses will only be handed out to entrepreneurs who will get their water from desalination plants or recycled water.

Given the recent drought, the Water Development Department (WDD) has recently rejected applications for new golf courses as well as upgrades for existing ones, on the grounds that they would not be using water from desalination or water recycling.

It has, however, given its permission for five golf courses to present their plans to the authorities, as it was satisfied with their water sources. They are being submitted by the Nicos Shacolas group, Aristo Developers and the Lanitis Group.

These plans would see the creation of a golf course in the Polis Chrysohous area, two in the Ha Potami area in the Paphos district, one in the Fasouri area of Limassol, and a fifth one close to Petra tou Romiou, near the existing Aphrodite golf course. All have made provisions for desalination units that will provide water not only for the courses, but also for accompanying housing units.

The WDD has rejected applications for two other golf courses, one of which came from the Paphos Bishopric. The Church of Paphos wanted to upgrade its existing golf course in the Tsada community.

The reasons cited for rejecting this application were that the plan involved watering the golf course from a borehole. The area is located a certain distance from the sea, thus making water transport from a desalination plant to the golf course expensive and impractical. Had the plan been accepted, the Paphos Bishopric would have automatically gained the right to create more than 1,000 housing units in the area, worth millions of pounds.

The WDD’s report states that “permits should not be given for golf courses which will be watered from boreholes, rivers or government dams”. The report went on to say that “priority will be given to golf courses which obtain their water from desalination and recycling schemes”.

The entrepreneurs that comply with these guidelines in their plans will then be allowed to put forward their applications to gain planning permission, a process which is estimated to take around 18 months. These applications should include detailed provisions regarding watering, development of the area as well as environmental considerations.

Last week, Agriculture Minister Fotis Fotiou announced that the water saving measures brought in for farming would also affect golf courses, with the government supplying them with just 30 per cent of the water they need.

These measures will come into action today.

Copyright © Cyprus Mail 2007

Crackdown on timeshare touts

Editorial
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Authorities appear determined to crack down on Cyprus property timeshare touts, in a bid to stamp out the soliciting of customers, which is believed to have an adverse impact on tourism.

On Sunday alone, 16 touts were reported in Paphos, as part of a police campaign to discourage the practice. A number of plain-clothes and uniformed officers have been placed on duty, patrolling Paphos’ tourist area.

By law, soliciting is illegal, but in a cat-and-mouse game with the police, touts are coming up with new and imaginative ways of clocking new customers. One is to sell scratch cards to passers-by. If a person wins, he or she is visited at home by a salesperson with the supposed prize.

Paphos police superintendent Lambros Themistocleous has said that the force has asked the Attorney-general’s advice on enacting legislation that would also make the sale of these scratch cards illegal.

Another tool in the hands of authorities would be to introduce stiffer fines for soliciting, as at present the penalties provided by law are not prohibitive.

For his part, the chairman of the Paphos Chamber of Commerce Kyriacos Droushiotis said that at a meeting held last November, the four timeshare companies active in the coastal town had promised to stop the sale of scratch cards or harass prospective Cyprus property buyers.

The companies were given a grace period by which to comply, but Droushiotis seemed to suggest that their time was up.

He also said a bill with tougher provisions on soliciting would soon be submitted to parliament by the Justice Minister.

Copyright © Cyprus Mail 2007

The Theory & Practice – Capital Appreciation

Antonis Loizou FRICS
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We have read recently in a U.K. national newspaper a report on Cyprus, from a disappointed British investor, who has bought a property for (say) £100,000 and now he cannot sell it for more than this. This situation is quite common and we have written in the past in this paper, what sort of returns people should be looking for and for what properties.

However, in a country where there is so much building going on, a potential purchaser has many options, whereas organized developers and estate agents are pushing potential clients towards their own projects. For this reason these individual sellers are at a disadvantage. In addition to the developers themselves, organized foreign estate agents who charge 12%-15% for a commission, direct their clients to those who can afford to pay them, usually the developers. So we could be quite correct in saying that a property, which was say bought last year for £x, its value is now at least plus 6%-8%. This is the theory, however and yes, it is a correct statement, since prices have moved upwards, but these increases are not necessarily a norm, attainable in practice, due to the extensive supply, with most buyers buying something new. So you might have a next door project of 50 units, being sold within 12 moths, whereas your own property, at a lower price, may remain unsold for another 12 months and even for a longer period.

Similarly the expected returns on one’s investment, could, many times be a misunderstanding. Residential (in town) properties can let with a return at a rate of 3½%-4% on their value, but the same must not be expected from holiday apartments. If you buy, in order to let your property, do not expect that clients will be queuing to rent your property, if this property is in a tourist area. Do not expect that because you buy with an equity of 30%, the remaining 70% will be self financed from your rental income, since it does not work out.

So there is a large difference between the theory and practice and care should be experienced in choosing your property depending on what you have in mind.

  • Beach/near the beach properties, will always have a ready demand due to the fact that beach is running out. Again, do not expect a 12 month let at the Protaras-Larnaca area, due to their seasonality, as opposed to the Limassol non-coastal line and Nicosia.
  • If letting is what you have in mind, the best town to choose is Limassol and then Nicosia (mainly apartments), whereas a 3-4 bedroom villa with a pool has a good rental in the Paphos region. If a resale is what you have in mind in order to reap the benefits of a capital appreciation, this is more uncertain and you cannot depend on this 100% when are calculating your finances. Again you should choose the right locations, avoid large projects and locations where there is a lot of new developments going on around and do not depend on the agent’s assurances (for the reasons we have described) necessarily. Buy where the locals do since you have a much wider market of buyers.

So, as a summary, we do suggest that for resale/rental properties, you must choose localities within which the locals buy/let. There is a steady demand for rent and buying, but buying in the “locals” locations, do not expect huge returns. To expect a 6%-8% capital appreciation p.a. in prices over the last year and a 3%-4% rental return is correct but it will depend on circumstances. A client of ours has directed his interest from Paphos to Nicosia (bought 4 apartments) and he got immediately a let for 12 months for all.

Coming back to this unlucky person who has reported his case in the press, we noted that he had his property valued by a self advertised advertising Co!! Although we offer our sympathy to his problem, we must try to use the correct people for the correct job. In this way we will get the best advice available, but the risk is always there, being an investment, stressing the fact that an investment for a resale is not suitable for those who depend necessarily on a quick sale.

By Antonis Loizou, FRICS

Copyright © 2006 Antonis Loizou & Associates Ltd. All rights reserved.

Police Investigating Fraud Claims over Paphos Development

Leo Leonidou
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Scam AlertPOLICE are investigating a series of complaints against a developer accused of taking close to three million pounds from around 70 people for properties in the Paphos district which have not been built, two years after deposits were paid.

Briton David Goodman told the Sunday Mail he had paid a £40,000 deposit for a townhouse in the village of Tremithousa in January 2005 but, “there is still empty land at the site apart from a very small construction.”

The full price of the property was listed at £56,475, with J&I Developers planning to rent it out for nearly six months of the year for a decade, and the buyer having access for the remaining half of every year.

Speaking from Northamptonshire in the UK, the 49-year-old said that after getting in touch with other people affected, “we worked out that the developer must have taken up to three million in deposits from what we estimate to be 60 to 70 people.”

He accused J&I Managing Director Ian Beaumont of having money paid into his personal bank account in the UK before going off to the Czech Republic. “I am being told that he is shortly returning to Cyprus, but this story has been ongoing for too long now without any results.”

Goodman says the developer is claiming problems with building permits as the reason for the delay. “Initially, the property was promised by the end of 2005 and then by the end of 2006, but I feel they are simply using delaying tactics. They are now telling me to be patient and that the property will be ready by this coming October. I think that he has no money to pay the developer though.

“I asked for my money back but was told there was no chance of that happening so I have contacted the police and various other authorities in an effort to resolve the situation.”

The Sales Director of Peter Stephenson Properties, who sell properties on behalf of J&I, acknowledged that delivery on the properties in question had been delayed. “I know the clients are very unhappy and I can understand their feelings of frustration and anger,” said Brian Overy.

“As a company, we are trying to do the best for the people involved. We are in touch with the developer and doing what we can as we feel a responsibility.”

He said that he had been in contact with Beaumont, who told him that he was planning to return to the island shortly to address the concerns raised.

Regarding Goodman’s request for reimbursement, Overy said the matter was between Goodman and J&I, but just before going to press, Goodman called the Sunday Mail, explaining that Beaumont had telephoned him from the Czech Republic. “He wasn’t very happy with me at all as he had found out I had contacted the press,” he said. “To my surprise, he promised to return my deposit in full. While this is great news, I am still cautious as he has made many promises in the past which he has not kept.”

Overy said that at the Tremithousa site, “work continued up until Christmas and I have been assured that payment has been sent to the contractor for further work to be carried out, with J&I’s architect negotiating a date for the restarting of building work.

I’m hopeful that although late, people will eventually receive their properties.”

Spokeswoman for Cyprus Police, Chrystalla Demetriou, confirmed that the force had received several complaints on the matter “and they are currently being investigated by our Fraud Department.”

Goodman said he wanted to live in the property with his wife after he retired, “as Cyprus is such a beautiful place which we adore.” He added that the dispute had left him “feeling grim”.

“We are heartbroken as we have saved for many years for a better life and this dream has now been ruined.”

Copyright © Cyprus Mail 2007

Battling The Builders: Who’s to Blame for Shoddy Work?

Leo Leonidou
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TALK to anyone who’s built a house, and the chances are they’ll come up with a horror story.

In recent weeks, the Sunday Mail has received several complaints from home buyers on the brink of a nervous breakdown after bad experiences with builders.

And it appears that there is nothing that can be done to rectify the situation.

British citizen Michael West, 34, moved to Cyprus in May 2006 to buy a flat and settle down with his Cypriot wife. He became aware that things were not going according to plan, even before he stepped foot on the island.

“We actually bought the flat off plan. It was meant to be ready in May, so we could have moved in straight away, but they didn’t finish it in time so we had to rent. They still haven’t finished, so we are still renting,” said West.

“That was just the start of many problems”, he sighed.

“When we actually got here, some of the rooms were not totally square and were in fact wonky. This was made apparent by the tiles on the floor. When we told them to straighten the wall, all the builders did was extend the wall to align straight. This, in the end, made some of the rooms around 15cm smaller.

“If that wasn’t enough, one of the builders actually pierced the supporting beam while extending the wall, making the flat actually quite dangerous.”

Little did West know that worse was yet to come.

“We turned up one day and I remember hearing water rushing from our apartment. The door was locked, so we couldn’t get in, and then we saw water rushing out from our apartment into the road.

“I eventually managed to get into the flat, only to see that the kitchen and bedrooms were completely flooded. The water had also damaged the parquet floor in the bedrooms. If that wasn’t enough, the builders told us that we didn’t even need to change the parquet. But the floors were squeegee and we knew the damp would ruin them floors so we insisted they changed it.”

And the bathroom was not without problems, as the 34-year-old from London told the Sunday Mail that the builders had fitted in a cabinet half the size of the bathroom. “When you sat down on the toilet, you could actually touch the cabinet with your feet,” he added.

West is not the only one experiencing problems with builders.

Jordanian national Issa al Daoud, 28, is the managing director of her own company based in Cyprus and has also recently bought a flat in Nicosia.

“I suffered so much anxiety and stress with the builders,” she told the Mail.

“They were making so many mistakes and in the end they were costing so much money just rectifying the mistakes. I also noticed that the developers had hired cheap builders and cheap material, which is, in my opinion at least, the root of the disaster.”

Her problems are also far from over.

Even though she has now moved into her flat and still suffers problems with the occasional leak from the ceiling, her bathroom is the biggest problem that has yet to be amended.

“Every time I take a shower, my bathroom floor gets flooded. That is still a problem which has yet to be fixed,” said al Daoud.

The Permanent Secretary of the Cyprus Scientific and Technical Chamber (ETEK), Linos Chrysostomou, admitted quality control was the biggest problem with builders on the island, but said property buyers themselves were also to blame.

“When somebody, and especially a foreigner, buys a property, they are obliged to make the proper research into who they are going to hire to build their home or indeed who they will be buying the property from.

“If a developer is offering to build the same home around £5,000 to £10,000 cheaper then in most cases, you should be aware that the developer may not be that trustworthy.”

Chrysostomou said misunderstandings often arose after an off-plan contract was signed between the developer and the buyer.

“I have noticed contracts are not properly drafted and the developers and buyers usually clash afterwards. That is another word of advice to potential buyers. Have somebody go over the contract before signing.”

The ETEK official also advised buyers to perhaps hire “their own civil engineer to look over construction now and again”.

So what does the problem really come down to?

Like Chrysostomou, West believes that the lack of quality control allows inexperienced builders, along with rotating people in charge, to overlook construction of their homes.

“I believe that there are good builders and bad builders in Cyprus and the same goes for good developers and bad developers. However, it is the developers hiring the subcontractors, so I believe that they should hire somebody to supervise quality control.”

Al Daoud added: “The biggest problem is that the developers simply do not provide a good quality of service. Supervising is also a major issue, because the developers obviously don’t want to hire a quality supervisor because it costs too much money for them.”

The Head of the Consumers’ Association, Petros Markou, said he was only too aware of the problem with builders on the island.

“We very aware of the problem. But unfortunately, we do not have the expertise to deal with this particular problem. It is a problem that can have a very bad effect on our island and our economy so it should be obviously dealt with quickly.”

He added: “The only thing that I can say is to advise property buyers to hire civil engineers, architects or a good lawyer when buying a property.”

A spokesman for the Cyprus Builders’ Association told the Sunday Mail that “the whole image of builders on the island should not be tarnished because of a few rotten apples”.

“Anyone with a compliant can go through the appropriate channels,” he said.

Copyright © Cyprus Mail 2007

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