14.05.2023
Demand in the housing market is mainly driven by population growth, household formation, employment and income growth.
The population of Cyprus increased by 85,000 people from 2011 to 2021 and by about 30,000 people in 2022.
Households are getting smaller as fewer people get married and have children. Cyprus has one of the lowest birth rates in the world; 1.3 births per woman compared to 2.1, which is the rate at which the population replaces itself from one generation to the next without migration.
The employment rate averaged 68% from 2000 to 2022, reaching a record high of 73% in the third quarter of 2022, slightly lower than the EU average of 75%.
Revenue growth averaged 2.2% from 2004 to 2022, hitting a record high of 8.3% in the first quarter of 2022 (though the growth was less than the rate of inflation).
In Cyprus, new home construction remains low due to both the economic crisis of the last decade and the lockdown during the pandemic.
Land availability remains low as most owners choose to delay selling or developing their property. Since property ownership is low taxed, many see it as an easy way to invest their capital while postponing building or selling.
Growing demand for residential property and limited supply have pushed up property prices and rents, further fueled by low interest rates over the past decade and government subsidies during the pandemic.
Demand for commercial property is driven by a strong economy, employment growth and consumer spending (especially retail).
The Cypriot economy has grown significantly since the end of the pandemic (GDP growth of 5.8% in 2022), in particular due to the growth of tourism, the attraction of technology companies to the island and the growth of immigration/population.
Minimum design
On the supply side, the construction of significant retail or warehouse space was minimal, while office supply was concentrated in a few projects in Limassol and, to a lesser extent, in Nicosia.
As office occupancy patterns and retail spending have shifted, there have been obvious pockets of oversupply and limited demand in the commercial real estate market, such as B/C offices in Nicosia vacated by banks, secondary retail space in Paphos and Larnaca, etc.
The main change over the past year has been the cost of funding for developers and investors, as well as the improvement of alternative options available to investors.
While companies coming to the island or expanding their operations currently have limited options, commercial real estate investors don’t know where to put their capital.
Given higher yields on government and corporate bonds and the higher cost of financing real estate acquisitions, most investors are demanding higher real estate yields to reflect these higher costs, as well as changing office usage patterns (due to work from home) and retail (through online purchases). This is already reflected in the results of listed European REITs (Real Estate Investment Trusts), where their value has declined by about 43% over the past year.
Thus, residential and commercial real estate markets move in opposite directions due to differences in supply, demand and price factors.
The housing market is experiencing growing demand and limited supply, leading to rising prices and rents. In contrast, the commercial market is facing challenges due to changing office usage patterns, retail spending and financing options.
Looking into 2024, residential property prices and rents are unlikely to change significantly, but demand could be reduced due to higher prices and higher financing costs. Local households will struggle to enter the housing market.
In the commercial sector, the limited supply of investor-ready real estate is likely to decline as better investment opportunities emerge elsewhere. This will increase illiquidity, especially if international investors demand higher returns from commercial real estate.
