Cyprus joining the Parity of Exchange System and immovable property

The Cyprus economy has joined the Parity of Exchange System, where it is expected to remain in the EMU antechamber for approximately 2 years before its entry into the EMU and the Euro.

However, what does this mean for property investment because the Cyprus economy should meet the Maastricht criteria as a prerequisite in order to join the EMU.

This means that inflation should remain under control, the fiscal deficit must be reduced, loan interest must be reduced to reach European levels (now is at 4.25 per cent, when we join it will be at 2 per cent, thus the reduction will be done in stages) and the most important is that our entry into the EMU will not cause the devaluation of the Cyprus pound. When the interest rates begin to drop and with the declared existence of £2.4bn, which are legal now (black money previously), what will it happen in the market?

The lower loan interest will attract more Europeans and other buyers into Cyprus to either purchase or invest in immovable property.

The current depositors will be targeting on a return that is at least above the inflation numbers plus a little bit higher, at around 5 per cent, which at present investors could get it only from immovable property.

At the same time though, the Land Registry will introduce shortly a new system on compulsory property sales and the target is to carry out compulsory sales within a period of 8-12 months (in Greece is 8 months and in Britain is 3 months) from the start of the procedure.

Obviously the banks will proceed quickly in those sales and this might cause an increase in supply and perhaps a small drop in prices in certain property sectors, due to increased number of possible mortgage liquidations. Although it sounds quite hard, from the humanitarian aspect, we do not agree on carrying out property compulsory sales within such a short period of time.

However, it will have some ‘good’ effect regarding the constantly increasing property prices. The new Central Bank regulations, regarding problematic loans - meaning loans that do not abide by their repayment terms and conditions, presenting installment delays exceeding 6 months (now) and probably 3 months (later) - will also have their impact on the property market.

So what will happen in view of these measures?

The Banks will restrict their loans to ‘trustworthy’ property development clients, thus causing suffering to the small newcomers into the property market.

The Banks will demand higher own contribution from both the developers and other borrowers.

The pressure to sell on time on the property developer’s part will cause a drop in prices and consequently the reduction of the developer’s profit due to ‘pressing’ situation.

People who want a loan for property purchase purposes will have to meet more severe requirements, thus resulting in reduced demand.

In previous articles we referred to the financing facilities for the developers and how the banks, in our opinion, should take into consideration the ‘conditions’ of the individual borrower developer. Surely, dear readers, we are caught in times full of unprecedented changes including significant variations in the financing facilities offered by all the banks (none excluded) in Cyprus.

So, we are expecting ‘turbulent situations’ in the Cyprus property industry, which, in our opinion, will be to its benefit at the end. The financially weak developers will be forced to get out of the industry, thus increasing the people’s trust towards the rest of them, while the above measures will bring a balance to the constantly increasing property prices.

For those thinking to take their money out of the country, it is not a wise option, since the interest rates abroad have been much lower than the ones in Cyprus, while the Central Bank bonds at around 6 per cent returns per year (on a long-term basis) is a competitive alternative in relation to the possible danger of the -15 per cent parity variation regarding the CYP£ against the Euro. Therefore, such a decision should be studied carefully.

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