Cypriots for generations have traditionally followed the rule to buy and keep as much real estate as possible. Despite the ups and downs of the real estate market, it has proved to be a relatively solid investment. Especially, when someone takes into account the 1999-2000 stock market bubble and its collapse thereafter, as well as the 2013 depositors money haircut. Both events led the investors to loose significant amounts of money.
According to a study of commercial real estate performance from 2000 - 2020, by DANOS / BNPPRE, real estate returned average annual returns of over 6 per cent, as a mean on an annual basis, favourably compared with returns from equities, bonds and shares. The RICS, stated that, in 2019, in Cyprus, on an annual basis, prices increased by 6.8% for flats, by 6.9% for houses, by 4.7% for offices, by 3.1% for retail and 1.4% for warehouses. Thus, adding to the capital appreciation of all types of real estate assets.
In the wake of the global pandemic, however, Cypriot investors ask if the case for their real estate investment is still strong, or they should diversify their capital to other types of investment. In particular, investors spotlight three factors that may put the long-term value of property assets at risk. First, the lockdown has shown that remote working is viable, leading to less demand for commercial space and offices. Shopping, Entertainment and even Education via internet, is also getting more popular. Automatisation, plays also a significant role for less commercial space demand. Abroad, Google, for example, told most of its 200,000 staff to stay at home until July 2021. Extending working from home means many people will give up on city and suburban accommodation, as we know it today, to move to more high tech and secure residential environment and or even to cheaper — suburban and rural — areas, driving down residential property values and reducing returns. However, the new kind of residential demand will balance the overall house prices. Second, after the pandemic, governments will be looking for new sources of revenue. The preliminary General Government fiscal results, which are prepared by the Statistical Service of Cyprus (CyStat) indicate a deficit of €930.9 million (4.6% of GDP) for the period of January – July 2020, as compared to a surplus of €385.7 million (1,8% of GDP) that was recorded during the period of January – July 2019. Stressed public finance liquidity, expose the real estate sector to higher taxes: the underlying asset (land) is immovable and politicians shall favour taxing property over raising taxes on labour (income tax) at a time of rising unemployment.
That puts a weight on the value of real estate to the investor, again reducing returns. Third, owning land and buildings has long been seen a good way of preserving (and exhibiting) wealth and protecting capital against inflation, because values and rents have, in Cyprus, most of the times, exceeded inflation. However, investors today might question whether inflation will be a serious case in the coming years. After all, the Cyprus inflation rate may be even below -3.6 per cent for 2020 (and 2021).
There is also a crucial long-term question that haunts the market — that of demographic shifts. As the Cyprus population continues to age, there will be fewer economically active, younger people relative to retirees. This may leave fewer buyers for property, adding to downward pressure on prices. Plus, the geopolitical situation in our region is profoundly boiling and the warfare activity is so evident in neighbouring countries, that could lead Cypriots to rethink their portfolio investment activities as they will have to weigh up whether or not exposure to real estate will protect their wealth in the long run (especially after considering the bitter 1974 Turkish invasion results).
On the other hand, if peace prevails, the influx of European immigrants - thus demand increase (specially from Greece, Bulgaria and Romania) continues and the private +public projects underway - conclude soon, then we will see a bulls’ real estate market, again soon. Is all about location, but this time, timing, as well.
Therefore, in the future, Investors will seek greater transparency and trust in their real estate investments. Despite the new trends and market characteristics, Real Estate has many advantages over investing in stocks, bonds or mutual funds. Real estate offers a relatively predictable cash flow; it may appreciate in value; it can provide a higher return because of positive leverage; and it can offer equity growth through debt reduction. On top of everything, real estate is not paper money, this is the asset you can hold tangibly which further enhances its reliability, use and return on investment. It is the relationship between GDP growth, geopolitical and social sentiments, and prospective demand for real estate that must be carefully analysed, though, before an investor proceeds with the acquisition and or development of any real estate asset.
Panos Danos BSc, FRICS, C. Env., VRS, IPF
CEO of DANOS An Alliance of BNP Paribas Real Estate,
member of the Cyprus Valuers board of directors