06.10.2023
Trends in the Cypriot as well as the European property market are reflected in the EY Cyprus report entitled “Mid-Year Industry Review: Cyprus Property” (October 2023). In particular, the report focuses on changing trends and developments in Europe and their impact on Cyprus, while citing challenges arising from geopolitical tensions, rising interest rates, inflation and government strategy. When it comes to property in Cyprus, it seems to be influenced by ESG practices, green energy and construction costs. Below are the findings of the EY Cyprus report on real estate trends in Europe and Cyprus:
Contents
Residential real estate
Europe
- It is in demand as it is considered a good hedge against inflation.
- In 2022, financing conditions led to lower volumes.
- High productivity due to reduced supply due to high production costs.
- Rising utility bills, as well as ESG practices, are driving demand for energy-efficient properties.
- Increased demand for rentals due to urbanization prevails. Cities across Europe are struggling to build new housing to meet growing demand. In addition, rising prices are making the housing market unaffordable.
Cyprus
- Local real estate demand is expected to remain flat or decline slightly due to rising construction costs and interest rates.
- Renting is becoming increasingly popular due to the high cost of living.
- Foreign nationals are expected to continue purchasing homes in coastal areas for various purposes.
Office real estate
Europe
Green and energy efficient Category A offices are in high demand as occupiers require modern infrastructure that is compliant with ESG principles and zero-emission practices. Most office properties in most European cities are over 20 years old, which poses a challenge as they will soon need to be refurbished. In the post-pandemic era, work from home has impacted the office market. There is a demand for spaces conducive to hybrid working.
Cyprus
Demand in select cities is expected to continue to be strong, supported by an increase in the number of headquarters being created and the trend of business relocation, especially after the war in Ukraine. Energy efficiency directives will impact the local market and many older properties will therefore have to be upgraded. The remote working trend in the EU is not currently expected to have a major impact on the Cypriot office market.
Commercial stores
Europe
Consumer demand has weakened due to a broader decline in disposable income. Retail sales are expected to be further burdened. In addition, consumers are now looking for ease of access and high quality facilities. Because of this, regional shopping centers suffered.
Cyprus
Cyprus is likely to follow European trends as online sales become increasingly popular. On the other hand, the cost of living crisis is expected to continue to negatively impact the retail sector as vacancy rates rise.
Industrial real estate
Europe
The industry has worked hard during the pandemic due to an increase in online sales. Currently, there is a decline in rental rates. This is facilitated by the low level of vacancy (the EU average is 12.2%) and not so high supply. Demand is declining due to the overall macroeconomic situation, and rent growth is slowing. New energy trends require improved facilities such as photovoltaic installations.
Cyprus
Industrial activity in Cyprus is limited compared to other European countries. Some industrial assets ended up in real estate (REO) portfolios and were sold accordingly. The sharp drop in entry yields that occurred in Europe was not replicated in Cyprus, so no significant changes are expected. ESG practices are likely to have an impact on the sector in the short term.
Emerging problems and challenges
Buying and selling property in Cyprus faces various challenges related to geopolitical tensions, rising interest rates and tightening lending criteria, inflation and government strategy.
Geopolitical tensions
The war in Ukraine caused a wave of uncertainty in the European and, as a consequence, the Cypriot economy. The sanctions imposed against Russia have had a significant impact on the Cypriot market. However, the market has shown its resilience. More than 10,000 specialists from Ukraine and other countries of the Commonwealth of Independent States (CIS) came to Cyprus, which, together with their family members, is estimated at approximately 24,000 people. This has led to an increase in demand for real estate and has led to an increase in rental prices. Additionally, there were a large number of Israelis and Lebanese who moved to Cyprus due to the uncertainty in their country.
Rising interest rates and tightening lending criteria
The ECB has embarked on a series of successive interest rate hikes to curb inflation. At the same time, banks are taking a more cautious position and applying more stringent lending policy criteria. However, borrowing for 2022 exceeded pre -pandemic levels, reaching around 3.2 billion euros, up 10% on last year, mostly in business loans.
Inflationary pressure
Inflation is expected to stabilize but remain high in the coming quarters. High inflation will continue to put pressure on construction indices, as well as rents and house prices. Thus, the purchasing power of potential clients will be reduced and the opportunities for real estate development will be reduced. On the other hand, inflation in Cyprus is one of the lowest in the eurozone.
Changes in government strategy and incentive systems
Cyprus has various programs to encourage the relocation of foreign companies, increase foreign direct investment and attract international talent. The cancellation of the Cyprus Investment Program entailed changes and new data, including further controls. Investors purchasing real estate worth €300,000 or more are allowed a residence permit on the island. The criteria have recently been revised and any shortcomings have been addressed to prevent abuse of the system. In the case of companies with foreign interests, third country workers are allowed work permits and their relocation to Cyprus. This is causing demographic changes and accelerating the relocation of foreign businesses, thereby increasing the demand for offices and housing.
