Confidence in Cyprus has seen a boost from foreign investors eyeing the country with renewed interest as the economy shows signs of a sooner-than-expected return to growth. Already recognised as a popular holiday destination and a business hub servicing international companies with multinational operations, Cyprus is growing its appeal with more incentives and improvements to its FDI framework.
Cyprus’ return to international markets after a three-year exclusion served as an important symbolic step towards a recovery. The country’s improved credit standing, after consecutive upgrades by credit rating agencies and the successful completion of a €750 million bond issue in international markets, is regaining global investors’ trust in Cyprus. So far, the third smallest EU member state has also achieved all the targets set out by its international lenders and has continuously beat estimates – with projections of exiting recession in 2015.
Cyprus’ resilience, improved economic performance and investment potential have not gone unnoticed. With new incentives to entice investment and the promise of better governance, many industry experts and multinational companies have recognised this as a ripe time to invest in the Cypriot market.
A Burgeoning Oil and Gas Sector
Cyprus has a strong track record of attracting international business and foreign direct investment (FDI) and prior to the global financial crisis enjoyed over 30 years of tremendous growth. Although still battling out of recession, the country has begun to draw significant interest from investors worldwide. Cyprus’ hydrocarbons find in particular has captured the attention of several global energy companies, such as Eni and Total, who have since set up on the island, while more recently Cyprus welcomed oilfield services giant Halliburton’s decision to base its Eastern Mediterranean operations in Cyprus – with fellow giant Schlumberger expected to follow.
US-company Noble Energy made the world-class natural gas discovery in 2011 and so far has confirmed reserves of 3.6 to 6 tcf, with a mean of approximately 5 tcf, in just one of the 12 offshore licensing blocks. The estimated deposits are enough to allow Cyprus to become both a regional and global gas exporter as well as provide a strategic contribution to European energy security – and the presence of major international oil and gas companies is supporting these efforts coming to fruition.
Further offshore drilling is expected in 2014 and 2015, and four additional reservoirs have already been identified, with oil deposit discoveries also a serious possibility. Cyprus’ aim of becoming a regional energy hub in the Eastern Mediterranean has made the construction of a liquefied natural gas (LNG) terminal and a larger energy centre a top priority. These plans would also open up opportunities for more oil and gas related businesses and investors to use Cyprus as a base to service their clients in the region. The country is fast developing into a key player in the regional natural gas market and establishing itself as a potential alternative supply source, following the Ukraine crisis and the instability in the Middle East, and is currently holding talks with Egypt, Oman, Jordan and Romania on possibilities of exporting its gas once it is commercially available.
Renewed Confidence in Banking
The lifting of all domestic capital controls and positive first quarter bank results have also begun restoring confidence in Cyprus’ banking sector and the current restructuring of the industry has opened up opportunities for more foreign participation in the sector. The island’s two biggest lenders, Bank of Cyprus and Hellenic Bank, have already garnered significant investor interest. New York-based hedge fund Third Point became a major shareholder in Hellenic Bank in 2013 and recently strengthened its position by purchasing €7.7 million worth of convertible bonds. The hedge fund currently owns 22.5% of Hellenic Bank, with Belarussian-owned international video game company Wargaming.net also owning 22.5%.
The country’s largest lender, Bank of Cyprus, recently announced the success of an oversubscribed private placement of over four billion new shares for a capital-raising of €1 billion. The shares were allocated to a wide range of institutional investors from Europe, North America and Russia. Among the interested parties was the European Bank for Reconstruction and Development (EBRD) as well as foreign hedge funds which submitted offers for a significant stake in the bank – including two major American hedge funds with offers for a €600 million stock purchase.
An Emerging Investment Fund Centre
Foreign exchange trading is a key growth area, and Cyprus’ upgraded investment fund framework has boosted opportunities and the number of investment firms. The emerging investment fund sector is an exciting development in Cyprus and it could become a multi-billion-euro industry. Cyprus has many key advantages, such as preferential access to virtually untapped markets and offering a European passport to the fund management industry providing excellent possibilities for cross-border and international fund distribution. The country’s strategic geographical location and good relationships with its regional neighbours as well as Russia and CIS countries, coupled with its cost-effectiveness, have long attracted investors to use Cyprus as a launch pad for their global investments. These factors have made this EU jurisdiction increasingly attractive to asset managers looking to capitalise on opportunities.
Despite having a small stock market, Cyprus has valuable assets, and alternative funds in large scale projects, luxury real estate, shipping and energy are already attracting significant interest – most notably from China, Russia and the Middle East as well as the US, following US Vice President Joe Biden’s visit to Cyprus earlier this year. Fund managers and promoters have also been attracted by incentives in the country’s citizenship programme, which offers Cypriot citizenship through an investment of €2.5 million in a collective investment scheme, provided the total value of the investment is more than €12.5 million, accompanied with the purchase of a property of at least €500,000. Industry experts say investors worldwide are seeing good prospects of a good return on investment in Cyprus, and with its solid Mutual Fund and Alternative Investment Fund frameworks, Cyprus is establishing itself as a new regional market and fast developing into a thriving EU fund centre.
Tourism Moving Up-Market
The island's tourism and trade sectors grew in the second quarter of 2014, easing Cyprus' economic recession. Tourism has long been a driving force of the Cypriot economy and arrivals as well as expenditure have seen an increase despite the crisis. In the first six months of 2014, arrivals increased by 6% compared to the previous year and revenue from tourism in the first five months saw a healthy rise of 8.6% year-on-year to €475.5 million. Cyprus has been attracting new interest thanks to its efforts to diversify its offering by developing agrotourism and wellness tourism and by extending the tourist season. The construction and investment in multipurpose projects such as luxury marinas, golf courses and more recently casinos are all part of the plan to upgrade Cyprus’ tourism product. Another recent coup for Cyprus in terms of FDI was the decision of one of the world’s leading hospitality and resort management companies, Buena Vista Hospitality Group, to base its regional headquarters in Cyprus and to develop the largest wellness resort in Europe with an investment of US$300 million.
Recovering Real Estate Sector
Property sales in Cyprus have also marked a significant increase this year thanks to interest from foreign buyers. In the first half of 2014, overall property sales in Cyprus to foreign buyers increased by 20% year-on-year. This has partly been spurred on by the incentives offered in Cyprus’ permanent residency and citizenship-for-investment programmes – which have seen a surge of interest from foreign investors. The sale of both residential and commercial real estate is on the increase with buyers continuing to purchase high-end properties in Cyprus. Evidence of this is the recent successful sales of luxury development Limassol Marina and the new €25 million commercial real estate project ‘The Oval’, as well as the sale of the multimillion seafront project ‘The Kimon’ in Larnaca to a Russian developer. Two other multimillion-euro-deals were made with investment company Ruby Coast Properties, with Russian investors buying ‘The Alexander the Great Beach Hotel’ in Paphos and luxury office complex ‘Kanika International Business Centre’ in Limassol. The two deals made with the Kanika Group marked the biggest foreign investments into Cyprus since its 2013 bailout, demonstrating strong investor confidence in the country.
Privatisation Attracting FDI
Cyprus’ efforts to privatise several state-owned entities by 2016 present a new opportunity in terms of FDI. National airline Cyprus Airways is likely to be privatised first and has already garnered interest from several investors looking to purchase the company’s assets. Other targets for privatisation are the electricity provider the Electricity Authority of Cyprus (EAC), the dominant telecommunications provider Cyprus Telecommunications Authority (CYTA) and the Ports Authority. There are already competing entities in the telecommunications, internet provision and energy sectors. Cyprus’ two airports in Paphos andLarnaca, upgraded under a Build-Operate-Transfer (BOT) arrangement, are also attracting a growing number of airlines seeking to use Cyprus as an air-transport hub.
Positive Outlook and Expanding Opportunities
Although the current economic climate remains challenging, Cyprus is determined to get back on the fast track and reclaim its title as an economic outperformer. To allay investor concerns, the government is making staunch efforts to improve its FDI framework and has vowed to cut through red tape to better facilitate investment. These efforts are beginning to bear fruit, and for the first time in months Cyprus has seen an increase in both bank deposits and in the registration of new companies setting up on the island.
Cyprus’ open economy and established role as a regional business hub between three continents continue to appeal to investors. Its liberalised Foreign Direct Investment Policy, not only for EU citizens but also for investors from third countries, along with its favourable tax regime makes it one of the most attractive centres for FDI in Europe. At 12.5% Cyprus’ corporate tax rate is one of the most competitive in the EU, and its extensive network of double taxation treaties with more than 50 countries has strengthened its position as a business gateway as well as a preferred location for corporate head offices for multinational companies from around the world – using the island as a regional base for centralised services.
A good example of this is the maritime industry, which has been one of Cyprus’ most successful export services. The country is considered one of the most influential global hubs for ship owning and ship management services and is home to some of the world’s most influential names in shipping such as German-owned Bernhard Schulte Shipmanagement, Russian-owned Unicom Management Services, Indian-owned Fleet Management and Italian-owned MSC Mediterranean Shipping Company. Today, Cyprus is the largest third party ship management centre in Europe and the largest crew management centre in the world, while the island’s international ship register is the third largest in Europe and the 10th largest in the world.
The current restructuring is presenting many opportunities for serious investors, as Cyprus has taken the bull by the horns and is forging ahead with an ambitious plan to steer its economy back to growth. Its international lenders – the International Monetary Fund and the European Union – expect the economy to contract by about 4.2% this year and to return to growth in 2015. Rebalancing the economy and addressing structural problems will not be achieved overnight, but the remarkable progress made, the attractive incentives as well as the ever-expanding opportunities emerging in its wake have certainly been recognised by foreign investors.
