INVESTMENT THESIS

In late 2019, the Cypriot economy showed classic signs of overheating in several areas. Commercial and residential property in cities, led by Limassol, saw double digit rises in value as well as in building permits grants.

 

In March 2020, the coronavirus epidemic swept the world. Cyprus entered lockdown early and as a result saw less than 990 cases and only 19 fatalities. In June, the economy started re-opening. 

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This rapidly closed with the onset of the second wave in November 2020. As 2021 arrives, it is clear that Cyprus faces a difficult year in transition. 

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Valuations in the property sector are currently driven by four key factors: 

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1. The Cyprus Investor Citizenship Scheme, which drove "lifestyle" investments in large residential and commercial property development, was cancelled on 1 November 2020. 

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2. Bank exchanges of land and other assets for non-performing loans; 

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3. Property buy-to-let investors, who are purchasing and renovating commercial and residential property in hopes of both an annual yield and a capital appreciation; 

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4. Investments in student housing, particularly in Limassol and Nicosia. 

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The rapid rises in property values are creating labour market distortions in previous years. Most wages have not increased in line with property inflation, and young labour market entrants or people working at minimum wage are encountering significant difficulties. For employers, rising rents are also a key issue. 

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Given the coronavirus shock and the end of the Citizenship by Investment programme, we believe property values will start to fall in early 2021. 

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Another factor to consider is the large number of small service vendors and competitors in Cyprus. Most segments are fragmented, with many small providers unable to gain economies of scale, and continuing business models that were more appropriate to 10-15 years ago.

 

Many segments are therefore ready for consolidation through mergers and acquisitions, or ready to be disrupted through radical technological change. 

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Foreign investors interested in "real economy" investments in Cyprus will quickly discover several adverse facts: 

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• If trying to bid on a competitive basis for contracts with Cypriot enterprises, they will quickly find that informal or family relationships are favoured, and that it can be difficult to break into a "pure Cypriot" enterprise. 
   

• Collecting payment can be extremely difficult and time-consuming. 
   

• Contract enforcement is a long and expensive process. 
   

• A different price structure exists for foreigners, which is usually at least double that expected by local investors. Bypassing this "foreigner value inflation" is critical to success. 

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At the micro-level of investments, therefore, it is important to pay significant attention to granular details which are almost never visible at the macro level of investment promotion. Significant caution is required.