Tourism Investments in Cyprus: A Brief Assessment

10 July 2015 | Philip Ammerman

In March 2013, Cyprus entered into a structural reform agreement with the Troika of lenders, comprising the Eurozone, the European Central Bank (ECB) and the International Monetary Fund (IMF). Its economy had suffered significantly in recent years as a result of unsustainable public expenditure, and at the time of the March 2013 “bail out” predictions of a sustained fall in GDP were common. Today, it is apparent that a government commitment to structural reform and to investment promotion has led to the first signs of GDP growth and economic stabilisation. Tourism arrivals have been rebounding, and major new tourism investments have been announced. This article reviews the current situation in terms of tourism investments in Cyprus.

Political and Economic Developments in Cyprus

In March 2013, Cyprus suffered a “bail in” of depositors in the Bank of Cyprus and the liquidation of Laiki Bank (the Marfin Popular Bank of Cyprus) as a condition for a EUR 10 billion public debt refinancing. This rescue package featured the first such attempt in which depositors were “haircut” or “bailed in”, i.e. their savings above a certain level were seized and replaced with bank shares.

In exchange for the € 10 billion bail-in, the Cypriot government committed to a range of structural reforms, including privatisation of state-owned enterprises, cuts to public sector wages and welfare reform. Despite occasional political disagreements, the Cypriot government has by and large committed to the reform programme and has been on track with implementation.

Exhibit 1: Cyprus GDP and Unemployment Rate

The economic impact of the bail-in was pronounced. Gross domestic product at current prices fell from € 19.4 billion in 2012 to € 18.1 billion in 2013 and € 17.5 billion in 2014, a cumulative decline of 10%. GDP was already on a downward trend due to the global financial crisis, but the March 2013 bail-in exacerbated an already difficult situation. In the first quarter of 2015, GDP growth showed the first signs of stabilisation and growth (albeit only at 0.1% year-on-year) since the crisis began.

Table 1: Quarterly Current GDP (CYSTAT)

Registered unemployed have climbed steadily since the crisis began. In December 2012, registered unemployed numbered 41,625 people. By December 2013, this had climbed to 50,625. By December 2014 these had fallen to 50,467, and by May 2015, the onset of the tourist season had seen unemployment fall to 39,672 people.

The greatest impact of the Cyprus rescue package has arguably been on the banking system. The merger of Laiki and Bank of Cyprus has been implemented, and it is encouraging that the Bank of Cyprus announced a € 29 million net profit for Q1 2015 and an increase in Common Tier 1 capital to 13.9%. Key issues to be resolved include the resolution of non-performing loans, which in February 2015 amounted to € 27.8 billion, or 164% of 2014 GDP.

Cyprus Investment Promotion and Tourism Investment Projects

The government of Cyprus has clearly understood the importance of promoting investment in the wider economy, and specifically the tourism sector. Some key decisions and measures that have been passed include:

The Cyprus Investor Citizenship Programme provides Cypriot citizenship to investors committing at least € 5 million to investments in property, government bonds, or other assets, with a special measure for impaired Bank of Cyprus depositors. President Anastasiades recently announced that this measure had brought over € 2 billion in investments in Cyprus.
The Cyprus Investment Promotion Authority (CIPA) has actively promoted Cyprus as an investment destination, and has implemented a number of roadshows and presentations worldwide.
In June 2015, the tender for the casino in Cyprus is scheduled to be announced. This will include the construction of a mega-resort, including at least 500 gambling machines, a 5* hotel and convention centre, and satellites in other towns. The total investment project is estimated at € 500 million.
Regulatory approval was recently given for the construction of the Ayia Napa Marina as well as the reconstruction of Larnaka Port and Marina. The Ayia Napa Marina is budgeted at a minimum of € 220 million. The Larnaka Port and Marina Project has been estimated at € 700 million.

Together with the recent announcement by Noble Energy that the Aphrodite Gas Reserves have been classified as commercially recoverable, it is clear that Cyprus will soon benefit from both a “real economy” stimulus, as well as the vital recovery of its reputation as an investor-friendly jurisdiction. To this effect, the full lifting of capital controls on April 7th, 2015 is of major importance.

Cyprus Tourism Arrivals and Expenditure

Arrivals have been relatively stable in the past four years. Arrivals in 2014 were slightly higher than 2013 (but below 2012), with 2.441 million arrivals. The major source markets continue to be the United Kingdom and Russia. Russian arrivals have gained significantly thanks to an easier visa regime and strong development by Russian tour operators.

Exhibit 2: Tourist Arrivals in Cyprus

Arrivals in 2015 and thereafter are affected by a familiar mix of factors:

Currency movements: the Russian rouble devaluation has led to understandable challenges to sales of Cyprus travel packages in Russia this year and last year. Conversely, the appreciation of the British pound has led many observers to suggest higher UK arrivals this year.
Low cost flights: The closure of Cyprus Airways has not led to the reduction in flights many pundits had suggested. In fact, the number of seats to and from Cyprus has increased given the expansion of Aegean and Ryanair, as well as a higher number of low cost airlines flying to and from Cyprus.
Political instability in the Eastern Mediterranean region has consolidated Cyprus’s reputation as a safe destination.

Seasonality of arrivals remains an important challenge in Cyprus. This is now an embedded characteristic of incoming tourism in Cyprus, as Exhibit 3 shows.

Exhibit 3: Cyprus Tourism Arrivals per Month, 2012-2014

Total revenue from tourism has increased from € 1.75 bln in 2011 to € 2.02 bln in 2014, evidence that pricing power has recovered from the 2008 crash (but possibly also indicative of a growing use of all-inclusive packages, greater Russian arrivals, and higher travel costs).

Average revenue per tourist has increased from € 731/tourist in 2011 to €829/tourist in 2014.

Table 2: Tourist Arrivals and Revenue, 2011-2014

Average expenditure per tourist does show a significant change between low season and high season. In June 2014, average expenditure was € 886/tourist, whereas in February 2014 it was € 693/tourist.

Exhibit 4: Average Revenue per Tourist

This steadily-increasing revenue per tourist between 2011 and 2014 looks like a positive development. However, hoteliers and tourism authorities should be on guard against Cyprus pricing itself out of the market. Tourists on vacation in Turkey, for example, report both superior facilities and lower prices.

The fact that average revenue in August 2013 reached € 992/person may be an issue of concern.

Table 3: Average Revenue per Tourist

A snapshot of arrivals, average length of stay and revenue per person is shown in Table 4, below, comparing August 2013 with August 2014. This is the most expensive month for tourism in Cyprus, and year-on-year results show a significant decrease in revenue/tourist, with the exception of Israel. Israel is a relatively new source market, and both arrivals, length of stay and revenue/person are increasing strongly.

Table 4: August 2013-2014 Comparison

Cyprus Hotel Investments

Hotel investments in Cyprus have been relatively subdued. Several major transactions are noteworthy:

The Meridien Hotel in Limassol has been purchased by a Russian investor. The hotel is now being entirely re-developed and re-branded into the Park Lane Hotel.
Stademos Hotels announced its investment in a boutique hotel in Limassol. This will expand its portfolio of existing properties in Paphos (the Elyseum) and Limassol (the Mediterranean).
Kanika Hotels purchased the Paphos Amathus and is renovating it into an all-inclusive resort concept.
Thomas Cook has recently expanded its SmartLine hotel concept in Cyprus, with investments and long-term leases in Protaras and Paphos.

It is highly likely that hotel valuations are still too high in Cyprus to spark the consolidation or sales of properties that is necessary. There remain a number of challenges to investing in and operating hotels in Cyprus, as we have mentioned in a previous article in Successful Business Magazine.

Conclusions

Over the past two years, Cyprus has proven its commitment to a pro-growth, open trading and investment regime:

It has chosen to work with the Troika in adapting structural reform, rather than defying them in the way that successive Greek administrations have.
It is boosted investments by the professional activities of CIPA and by the Investor Citizenship Programme. The latter has delivered over € 2 billion in property and related investments.
It has authorised important new investments, including the Ayia Napa Marina (€ 220 million), the Larnaka Port and Marina (€ 700 million), the VTT terminal at Vasiliko (€ 300 million).
It will shortly launch tenders for the development of a casino mega-resort (€ 500 million), while also proceeding with privatisation of state-owned enterprises such as the Cyprus
Telecommunications Authority (CYTA). Other marina and golf projects are under study.
It has agreed to the politically challenging duty to liquidate Cyprus Airways, which has been operating at a financial loss for years in violation of EU state aid regulations. Following the liquidation, scheduled and charter airlines have made up the gap, and actually increased flights to and from Cyprus.
It has contributed towards attracting new investors to recapitalise Bank of Cyprus, which recently announced a first quarter 2015 profit.
It continues to work closely with Noble, Total, and other energy groups for the development of offshore hydrocarbons.

Tourist arrivals and revenue have been stable despite the political and economic turbulence in Russia and Ukraine. Investments in the hotel sector, however, remain limited, despite the relatively encouraging progress on attracting investments in other sectors. This is primarily due to several factors:

Cyprus incoming tourism remains highly seasonal, creating problems in the full-year amortisation of a hotel asset.
Operating costs in Cyprus remain high.
It is easier to invest in a property (that will hopefully appreciate without significant overheads), than in a high-maintenance asset like a hotel, which requires full-time operation.

An important future risk will be to see how the Bank of Cyprus deals with non-performing loans. We understand that many of these loans have been extended to hotels and property development companies. This may also create opportunities for investment in distressed or foreclosed assets.

Despite these risks and operating issues, there are a number of investment opportunities available in the hotel sector, particularly if an investor focuses on high quality of service (which can only be delivered by high quality staff), and on achieving a necessary economy of scale. The latter may require 2-3 properties in Cyprus, rather than just one.

A key uncertainty today remains whether or not Cyprus will reach a political solution to the “Cyprus problem”, or the occupation of northern Cyprus. The initial negotiations between President Nikos Anastasiades and Mr. Mustafa Akinci are highly positive. A solution to the Cyprus problem which would hopefully open the closed city of Varosha and other areas in the occupied north, as well as improve transport routes, would create a major investment momentum in the tourism sector.

This sector therefore requires close monitoring and analysis, and it is hoped that the relatively positive course of development seen in the last 2 years will continue.