A Bright Spot in Cyprus

While the banking sector in Cyprus churns, the island's ailing real-estate industry is casting a hopeful eye to a large gas discovery recently off the country's southern coast.

Real-estate values on Cyprus have plummeted along with those in most southern European countries. The immediate outlook remains grim, especially with the eruption of the banking crisis.

"In the short term, everyone is numbed, and until a solution is found of some sort I cannot see anything in this economy moving," said Nicholas Tofarides, managing director of real-estate developer Tofarco, based in Nicosia, the Cypriot capital. "Everything is frozen."

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The outlook for Cyprus's real-estate sector, including this high-end development in southern Cyprus, could brighten even as its financial sector struggles.

But many in the real-estate sector are taking a small amount of comfort from the discovery in 2011 by U.S.-based Noble Energy Inc. of an estimated seven trillion to eight trillion cubic feet of gas.

That is enough to make Cyprus energy independent for decades to come. "The whole dynamics of the country will be changing hopefully for the positive," said Michalis Hadjipanayiotou, chief executive of Cypriot luxury developer Cybarco, a shareholder of the Limassol Marina project, an exclusive waterfront development in Cyprus.

Overseas companies already have approached the Cypriot authorities for the construction of a liquefied-natural-gas plant, which will help process and export the hydrocarbon reserves. Earlier this year, Cyprus announced agreements with France's Total SA, Italy's Eni SpA and South Korea's Kogas over Cypriot energy exploration.

To be sure, the ability of Cyprus to become a player in the boom-and-bust energy industry remains to be seen. So far, there is no guarantee that exporting gas will be commercially viable, and even if it is, Cyprus won't export the gas until 2018, according to some estimates. Also, some believe border disputes with Turkey and Egypt could make the exploitation of this natural resource even more cumbersome.

But George Lakkotrypis, Cyprus's energy minister, recently has been quoted in local newspapers as saying his country needs now, more than ever, to quickly generate revenues from the gas discovery.

Developers such as Mr. Hadjipanayiotou hope that as a result of the gas discovery, large global companies will choose to base themselves in the country, whose population is about 1.1 million, according to the World Bank. "If the government has more money, they will start investing in more infrastructure projects, which will bring in more people and make the country more attractive," he said.

The Cyprus real-estate industry, which represents roughly 12% of the country's gross domestic product, hasn't had much good news lately. The banking crisis�most recently seen by the country's request for a �10 billion ($13 billion) bailout and the controversial plan to impose a levy on bank deposits�threatens to cut demand for office space further.

"Most of the country's economy is in financial services, which will be hit, resulting in an increase in availability of office space," said Pavlos Loizou, a real-estate adviser with Nicosia-based Leaf Research.

"We don't yet have large companies employing thousands of people at the same time. Business parks are great from the moment that you have the demand. If the gas makes business viable, this is a possibility. But we need to see what demand will be like, and this is far away," Mr. Loizou said.

The real-estate industry is likely to get worse before it gets better. If the levy on bank accounts is approved, it would reduce spending power and likely deter capital inflows.

The outlook was much sunnier before the financial crisis. Residential real-estate prices quadrupled between 2002 and 2008, according to the Royal Institution of Chartered Surveyors in Cyprus. In some cases, the increase in prices was even higher, especially in coastal areas and for land, according to research reports by real-estate firms.

But this growth wasn't sustainable, and significant overbuilding resulted. Between the second quarter of 2009 and the first quarter of 2012, prices for prime residential properties outside the main tourist areas dropped an average 20%. In the tourist areas, where foreign buyers dominate the market, prices halved in some cases, according to the index.

Prices for properties in tourist areas are expected to see a 10% to 15% drop on top of current declines, and property prices elsewhere will fall another 20% to 30%, with higher decreases expected for land, the surveyor group forecasts.

"We are expecting a further correction in prices in the next couple of years," said Mr. Loizou, who is in charge of the surveyor group's property price and rental index.

The drop in prices has been triggered partly by a contraction in the number of foreign buyers, who now make up 20% of the total, down from 50% in 2007. There also has been an increase in the unemployment rate to near 15%, and banks have virtually stopped lending as a result of the overall European credit crisis.

The latest turmoil surrounding the bailout plan will only compound the problems. "The recent events are likely to magnify the decrease in prices as consumption levels will decline, resulting in a drop in demand for retail space and an increase in unemployment," Mr. Loizou said.

In response to the property market's weakness, the government has tried aggressive resuscitation, including a discount on land-registry transfer duties. Also, since 2009 the government has offered permanent residency to buyers from outside the European Union who paid more than �300,000 for a property. That measure has attracted some 50,000 Russians, mostly businessmen, to take up residence in the coastal cities of Limassol, Larnaca and Paphos.

"There have been signs that these measures have had a positive effect in some submarkets where Chinese buyers have shown a particular interest," Mr. Loizou said.

But for now, the property sector, along with much else in the economy, is comatose. "The real-estate industry is directly linked to the banking industry. The vast majority of the transactions are done through the loans, said Mr. Tofarides of Tofarco. "And the confidence in the banking sector has been shattered."