Choosing the right location for any Cyprus property investment should not be based on sentiment, culture, personal taste and preferences but rather on the economic potential of the specific locations under consideration. According to the principles of economics, prices are determined by the market forces of demand and supply. Studying the law of demand and supply will lead to a better understanding of how the entire market moves. By understanding the factors determining price movements we can make a more sophisticated decision. In this article we attempt, by explaining the simple economic theory of demand and supply, to analyse the Cyprus property market, and how property prices move, and to answer probably the most significance question for a property investor. Where to invest? (Choose the location).In order to choose the right location an investor should thoroughly understand the relationship between supply and demand. If demand exceeds supply then prices increase. If supply exceeds demand then prices fall. Lately in Cyprus residential properties have shown an excess of demand resulting in property prices increasing; on average, property prices increased by 8-12% per annum over the last 5 years.
Where should an investor invest?
An investor must invest in places where there is a high demand for properties and high rental potential while supply of property is limited. If demand continues at a high level and supply is not high enough to offset demand surpluses then prices are pushed upwards. An investor must buy properties in locations where supply of property price is inelastic. In other words, even though there is strong demand, supply of properties (for various reasons) is limited or cannot increase resulting in prices shooting up.
Examples of location characterised by inelastic supply:
Beach and Sea Front properties
We all know that everybody wants to be on the coast. The main characteristic of a Cyprus beach front property is its limited supply. If we take a realistic example, on the East Coast of Cyprus supply of beach front properties is nearly zero while there are investors desperately looking for such properties. These wealthy buyers are willing to spend fortunes to reserve coastal availability.
City Centres and High Streets
Demand for commercial and business locations will always exceed supply. You cannot find a commercial property, even for rent, in most high streets.
Properties with unique features
Properties with spectacular views or on hillsides, penthouses with uninterrupted sea views, homes next to National Park green areas and on lakesides will always have a market advantage over other properties. We see prime properties in developments sell first, even though they are the most expensive.
Marina and Golf Course properties
Properties which sit on Cyprus golf courses or are near marinas will always be expensive and marketable. The reason is that the demand for these types of properties is really high since there are plenty of wealthy buyers who enjoy such sports and hobbies while supply of these properties is limited.
We understand that we may not be able to afford to buy a property that has been built in a prime location. Should we not invest in property? Of course we should! However, identifying the factors determining the demand and supply for properties will help us to make the right decision.
Consider the following investment examples:
An overseas investor decides to buy a property near the costal area of Protaras Cyprus. What are the economic implications of his choice? An overseas investor has the option to invest in various countries, such as Cyprus, Spain, Portugal, Malta and Turkey, but he chooses Cyprus. Within Cyprus he could buy a similar type of property near the coasts of Paphos, Limassol, Larnaca or Famagusta. Within Famagusta district he could buy a property in Ayia Napa or Ayia Thekla but he decides on Protaras. It seems to be an instant property choice but what is the economic reasoning? As Dominic Farell writes in his book Jet-to-Let Bible, locations are identified where supply and demand create favorable conditions for property investors.
Main factors affecting demand for properties
Economic Growth
A country’s economic growth is affected by the level of Government and Private Spending (investment). Investment leads to growth in the country’s overall wealth. This will eventually result in higher property prices. Choose to invest in countries where there is aggressive government and private investment. In Cyprus recently we have seen the merger of Laiki Bank (second biggest bank) with the Marfin Group and the announcement of Marfin's intention to invest up to 5 billion within the next 5-10 years.
Choose to invest in countries where big investment projects, such as marinas, golf courses, new airports, ports, hospitals, motorways and railways, are under study or construction. High property inflation has been experienced in countries which have hosted the Olympic Games. All of these investments will eventually increase the buyers’ disposable income and the affordability of higher levels of individual investment. The greater the wealth households have accumulated, the larger will be their consumption. (It’s been noticed that top-end properties on the east coast attract local investors who have experienced large growth in their wealth due to overall economic growth).
We should mention that the level of investment is affected by taxation and technology so we expect that private investment in particular will be increased by changes in technology.
Interest Rates and Banking System Flexibility
We have been discussing investment so far but ignoring the most essential factor for determining the investment choice; the level of interest rate. Interest is the financial cost an investor pays to borrow money required to accomplish his investment. Considering interest rate in the context of investment versus return, the following rule applies: if (net) return exceeds interest rate it is possible and sensible to invest.
In fact, the lower the interest rate the higher the level of investments, so it’s reasonable that property prices increase. The opposite is also true. An investor should choose to invest in countries where the cost of borrowing is low, and expected to remain that way, in order to secure the future growth of the investment. As interest rates fall, more and more buyers can afford to pay the mortgage instalments, resulting in increased property demand.
Along with interest levels, what is important is the flexibility of a country's banking system. If banks allows greater LTV (loan to value) mortgages the demand for properties increases. Have a look at the following example:-
An investor who has 30,000 Cyp available can only buy a property up to 100,000 if the bank lends up to 70%. However, as banks become more flexible, the same deposit can buy a property up to 150,000. Banking system flexibility affects the demand for property.
International price differences
In Cyprus at the moment about 50% of property demand consists of overseas investors. The price difference and future expected growth make investors look for international destinations to invest in.
Main factors affecting supply of property
Certainly (at least in theory) there will be a time in the future when there will be zero supply of property. Population increases exponentially while supply of land is decreasing since there is limited land on earth. I can imagine what the land and property prices will be in 2100, when demand for shelter only is going to be over 10 billion (4-5 times greater than today). Most probably planning regulation will adjust building factors to allow higher building to accommodate more people within certain areas.
All reasonable buyers understand that limited supply of property results in a rise in property prices, given that we have important reasons to believe that demand will be maintained at high level. As we mentioned at the beginning, an investor should buy properties where there is an inelastic supply.
Property Prices
The most important factor affecting supply of property is the property price. As property prices increase, property/land developers will be willing to buy land for further development. As developers are keen to offer higher and higher prices to buy land, more landowners would sell their land.
Land Availability and Planning Regulation
As you may be aware, not all plots of land have the same development allowances. Normally, coastal areas allow lower building factors (20-30%) while residential areas closer to towns have building factors of 60-120%. The lack of Cyprus Building and Planning Authorities tends not to favour investors. Imagine that you bought a house in an area where there is a limited supply of property. Overnight the regulation are changed to suit certain parties (normally associated with countries characterised by a high level of corruption) which means that supply of property might have be increased to exceed demand, resulting in a fall in property prices. An investor should do his research and must be fully aware of the building factors and expected changes which might happen in the near future. In locations where building coefficient is expected to be increased he would be better to invest in land rather than in a house or apartment.
Consider the following example:
An investor has invested in property with the intention of selling on completion for a profit (within 2 years). Before he completes the property, the developer releases another 400 unit project next to the first one, with attractive financing, more facilities and an improved design. What do you think? Your property might struggle to sell or might even be sold below the initial price. In conclusion, investors should invest in areas where demand exceeds supply, should explore exclusive areas and choose properties that have features which make them stand out from the competition. They should look for locations (countries) where they can expect stable economic growth and low interest rate levels. Remember that private and government investment will eventually result in greater over-all wealth.
