What impact will Coronavirus have on the real estate market in Cyprus?
Since the government introduced its measures to deal with the Coronavirus outbreak, which included banning unnecessary movements and contact with others, the real estate industry has come to an almost complete standstill. As a result, it has caused concern and anxiety within the sector.
Below, IPN’s Managing Director, Achilleas Kolonas, expresses his views on the short, medium and long-term effects expected in this field.
The most immediate part of the buying process most at risk are viewings. As both buyers and sellers have to follow the instructions of restricting all non-essential movements, most agencies have had a massive decline in the number of viewings conducted. This is even more apparent for those agents who primarily deal with an international clientele as airports around the world remain closed (or have limited flights).
For real estate companies, not having viewings results in no potential cash flow which in turn has a knock-on effect on both medium and long-term strategies. Even when some form of ‘normality’ returns, it may take some agencies several months to get back up and running, as in many cases, once a client identifies a property to purchase it can often take weeks/months to complete the sale process- depending on its complexity (dealing with banks, lawyers, government departments etc.). For agencies to survive the short-term impacts of this, liquidity will need to be protected and spent wisely as it may take numerous months before returning to positive cash flows.
In the medium-term, both buyers and sellers are expected to pause to see what the impact of the Coronavirus is likely to mean for their investments or moving plans. In some cases, sellers may even be in total denial with the situation around them and will pull up the drawbridge, putting the sale off until it gets better again which means Cyprus could be facing another stand-off period where property sales decline.
If forecasts are correct and the economy does inevitably contract and subsequently many people are laid off, the demand for not only buying but also renting property will decrease. If tenants start to struggle to pay the already high rents (compared to the average salary of the country) it will mean that either tenants will look to decrease their current rental amounts or look for cheaper accommodation elsewhere. Ultimately this will bring down the yields for those investors who invested money into property right across the island.
One slight positive, for the banking institutions in Cyprus at least, is that due to the banking crisis of 2013 many properties had been bought and paid for without the need for mortgages or loans. This was because the banks had to introduce much stricter criteria which had to be met in order to obtain a mortgage, which proved hard for many customers to achieve. This means that, if the need arises, it will make it easier for investors to sell as they will not need bank approvals for this, meaning the economy should react to price increases and decreases more easily than in the 2013 crisis for instance.
Sticking with the banks for a moment, the above doesn’t mean that the banks will be safe through this next inevitable crisis as foreclosures have already been postponed and people’s ability to pay back non-performing loans will become even harder. A Banks’ profitably relies on its customers paying back loans, meaning that if they become stuck once again the banks will take a further hit to an already struggling sector. One of the solutions being discussed is easing the measures related to obtaining a loan or mortgage. This in itself causes further issues as if this happens, banks may be subject to approving a number of ‘risky’ clients which is what led us to the banking crisis of 2013, thus inevitably just “kicking the can down the road”?
Depending on the initiatives that the government will offer in terms of grants/loans to both businesses and individuals; with regards to the accessibility and flexibility of these, it will have a significant impact on how the property market will react, not only in the medium term but long term too.
More positively though, if we look at the long-term impacts of the virus on the real estate market, history has proven time and time again that real estate investments are one of the best decisions an investor can make.
Mr. Walid Moussa, President of the International Real Estate Federation (FIABCI World), spoke about his vision of the situation in the real estate market in the context of the Coronavirus pandemic. According to him, Coronavirus will certainly have an inevitable impact on the real estate market. However, in the long run, real estate investments will prove to be much safer than investments in stock markets.
Stock markets once again collapsed not only in Europe and the United States, but all over the world. At the same time, real estate investments, especially during times of crisis, remain the safest. This is because the real estate market reacts to all ongoing processes more slowly as it is more difficult to influence it. Contrary to all efforts of the Central Banks of Europe and Asia, as their stock markets continue to fall.
So regarding the situation in which rental yields do come down, it won’t be to the same volatile nature as that of other industries, yet still earning investors higher returns than having the same level of liquidity sitting in the banks due to low-interest rates or even, in some cases, paying the bank as interest rates go negative.
At the moment, it is difficult to say how much Coronavirus will affect real estate agencies, undoubtedly, real estate demand will decline. However, there will be some exceptions, for example, one will observe a fall in prices for residential and commercial properties meaning those investors who have been priced out of the market over the boom years, may once again find themselves on the property ladder.