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Leaf Research – an advisory firm providing real estate market research, strategic advisory services, and valuations – has released its 2014-2015 Forecast, through which it gives an overview of the market and projections for the future.

Despite the expected stabilisation and minor recovery of the economy, it estimate that in the near-term, real estate prices, especially that of land, will decrease further, as no substantial uplift in the price of the end product is expected, the rate of sale is likely to remain slow, and no debt-finance will be available.

Furthermore, Leaf Research predicts that the gap between asking price, valuation and transacted price will grow further, due to increased uncertainty in the marketplace caused by a lack of market signals (transactions).

Assessing household debt and non-performing loans (NPLs), Leaf Research explains that there has been an annual decrease of 7.1% in the total loans of households in 2013, in comparison to 2012.

Most household loans are housing loans (€11.8 billion), the total of which equals 53% of total loans outstanding. The total of NPLs amounts to €24.1 billion, which equals 147% of the 2013 GDP, with the majority of NPLs recorded in the construction sector, amounting to €4.62 billion.

At the end of 2013, NPLs represented 53% for Bank of Cyprus and 47% for Hellenic Bank, whilst at the end of Q3 2013, NPLs equated to 47% of the Cooperative sector’s portfolio.

Whilst Leaf Research concedes that NPLs appear to be stabilising, the levels of collateral disposal are described as being essential, and thus the need for further recapitalisation of the banks is likely to be necessary.

Moving on to transaction and volume prices, Leaf Research explains that the highest movement in total volume in 2013 (31% or 1,164 sale and purchase agreements) and purchases by foreigners (38% or 445 sale and purchase agreements) were recorded in the Paphos district. Some 27% of sale and purchase agreements in Cyprus (1,017 sale and purchase agreements) involved foreign buyers.

The smallest number of sale and purchase agreements (583) was recorded in Famagusta district (6% of total), whilst the lowest percentage of transactions to foreigners was recorded in Nicosia (13% of total transactions, 92 properties).

Prices decreased across all cities and for all types of real estate, with the largest decrease having been recorded for shops (42% decrease in relation to Q4 2009) and the lowest in houses (26% decrease). The largest decrease by city was recorded in Nicosia, where prices plummeted, due to the capital being the last locale to be affected by the crisis, with its economy being largely reliant on the public and the banking sectors.

Still, Leaf Research explains that the decrease in transaction volume and property prices does not present an accurate picture of the property market. There is a dearth of demand for land purchases (especially fields) and for construction in secondary locations. In multiple cases, especially for ‘mass production’ real estate, even though prices are below construction costs, there is no interest.

Amongst the perceived prospects for 2014, Leaf Research lists the following:

• Privatisation of semi-public organisations according to MoU terms, starting with Cyta, the EAC and the Cyprus Ports Authority;
• Changes in public sector operation, including early retirement schemes and abolishment of mobility restrictions to permit personnel to move across departments;
• Immovable Property Tax revision by adjusting 1980 prices to 2013 values (readjustment of tax rate is expected);
• Amendment in legislation for speeding up the process of real estate foreclosure, ensuring that properties are disposed of within 2.5 years of initiating legal proceedings for someone’s primary residence and 1.5 years for all other properties;
• Launch of casino licensing process, with the Government submitting the relevant bill;
• Formulation of a strategic plan for the exploitation and utilisation of state property (including real estate);
• Completion of town planning and regulations, which will determine the development potential within the British Bases;
• Establishment of NLPs and property management units in all banks and COOPs;
• And reassessment of property taxation method and calculation so as to increase state income, and transfer the tax burden on owning the property rather than on the transaction.

Rationalising procedures and liberalising information exchange between Government departments and financial institutions will increase pressure on borrowers and will allow for the financial system to function more effectively in relation to the management of its multiple problems relating to NPLs.

Concluding with its thoughts and forecast, Leaf Research states that the smaller than expected decrease in GDP disguises the uneven allocation of the effects of the economic crisis. The gap between rich and poor, as well as the tension between locals and foreigners in the labour market, has increased.

Unemployment is likely to begin decreasing or at least be contained. This will not be a result of the stabilisation of the economy, the report notes, but of the Government’s plans/ incentive schemes for companies to employ staff and the increase in the levels of part time employment.

Moreover, there will be an increase in real estate supply, especially secondary residential units and commercial space for rent. This, in conjunction with decreased demand due to a decrease in local’s purchasing power, will subdue any forthcoming recovery.

In the short-term, Leaf Research believes that the biggest challenge will come from the prospect of development within the Sovereign Base Areas, since this will significantly increase the supply of available land in Larnaca and Limassol.

In the medium-term, the economy will face the ongoing challenge of the banks’ deleveraging and foreclosure of real estate assets, while in the long-term there will be multiple policy issues relating to the reckless incentives provided to boost construction by granting additional building density for various developments which has created ‘pent up’ oversupply.