21.07.2024
Significant investments have been made in Cyprus to develop tourism infrastructure, including the construction of hotels, the creation of quality entertainment venues, and improvements in service, catering, and staff training.
In recent years, there has been an annual growth in tourist arrivals of about 8%, which, combined with planning relaxations introduced by the previous government, allowed most hotels and tourist facilities to expand or upgrade to meet the increased demand and enhance Cyprus’s competitiveness in the international market.
Loans and advance payments from tour operators were secured to finance these improvements, in the hope of medium-term profits. However, the situation in the international tourism market has changed dramatically. Cyprus’s competitors, such as Turkey, Egypt, and Greece, have regained their positions and started reclaiming their share of the tourist market.
This shift has been driven by lower prices offered by these destinations, the lack of direct flights from major European cities to Cyprus, the closure of some airlines, and the low exchange rate of the Cypriot currency compared to those of its competitors. The shortage of labor in the tourism sector is also exacerbating the situation, forcing tour operators to demand increasingly larger discounts to narrow the gap between Cyprus and other countries.
Additionally, the distance from Cyprus to major European cities and the limited number of direct flights negatively impact tourist arrivals, while statistics show that tourists’ purchasing power and the length of their stay on the island are decreasing.
Competition is also intensifying from the Turkish-occupied part of the island, where, with the Cypriot government’s leniency, vacation prices are significantly lower.
After years of stagnation in its tourism industry, Cyprus has managed to partially improve its tourism product, but the country now faces new challenges. There is a risk that profitable tourism projects could become unprofitable, as the tourism industry depends not only on local demand but also on international events.
As a member of the European Union, Cyprus is limited in its ability to subsidize national airlines to reduce airfares, and rising temperatures in Northern European countries weaken Cyprus’s appeal as a “sun and sea” holiday destination.
Hotel profitability in Cyprus varies but averages around 10%, which is a reasonable figure. In the case of positive forecasts and revenue growth, this figure may decrease to 8%, while in a worsening scenario, it may increase to 12%. Any business plan relies on forecasts based on reasonable assumptions and data, but the local tourism market is so volatile that risks remain high.
Unlike real estate, which can be sold later, hotel business revenues must be secured during the season. Real estate is directly linked to the success or failure of the tourism industry, considering that 70% of property sales (in value terms) are directed to the foreign market. The Chinese market has shown interest in investing in tourism and hotel real estate, including projects in Larnaca and a major hotel in the Sotira area.
Given the lack of alternative investments in Cyprus and low deposit rates (1%-2%), as well as the unstable position of local banks, the expected returns from tourism projects appear quite attractive.
However, it is essential to consider that international events can rapidly change the situation; for example, a terrorist attack in Egypt or an accidental military conflict between Greece and Turkey could lead to a sharp shift in tourist demand, negatively affecting Cyprus.
Additionally, the Cypriot hotel industry faces challenges from private rental housing through platforms like Airbnb, which attracts about 30%-40% of visitors.
International circumstances may jeopardize investments in the tourism sector, but part of the responsibility also lies with the hotel business investors themselves and the unions, which make additional demands.
