Standard & Poor’s raises Cyprus rating

cyprus credit ratingSTANDARD & Poor’s upgraded its assessment of Cyprus on Friday to ‘BB+’ from ‘BB’, with a stable outlook.

At the same time, it affirmed its ‘B’ foreign and local currency short-term sovereign credit ratings.

S&P said that it expected the Cypriot economy will expand by about 2.7% this year and maintain average annual growth at just under 2.5% between 2018-2020.

“We think that the sovereign’s budgetary position will on average show a small surplus over 2018-2020, driving a discernible decline in government debt” it said.

“We are therefore raising our long-term sovereign credit ratings on Cyprus to ‘BB+’ from ‘BB’ and affirming our ‘B’ short-term rating. The stable outlook balances our view of Cyprus’ fiscal and economic progress against unusually high levels of nonperforming loans in its financial sector, alongside risks of weaker reform delivery ahead of next year’s presidential elections” the rating agency noted.

It explained that the upgrade reflected its views of Cyprus’ stronger-than-expected economic growth and fiscal progress. “Under our projections, general government debt will continue to decline even as the private sector deleverages. We estimate that net general government debt will drop to below 90% of GDP by the end of 2018 versus slightly under 100% of GDP at end-2015” it said.

S&P estimates that after expanding 2.8% last year, Cyprus’ economy will continue to post solid GDP growth of between 2.0% and 3.0% over its forecast horizon and that the unemployment rate, 13.3% at year-end 2016, will fall below 12.0% by 2018.

In the light of Cyprus’ strong economic performance and previous budgetary consolidation efforts, the rating agency estimates the government’s budgetary position to have ended in a small surplus (0.1% of GDP) in 2016, outperforming its own target by 0.4 percentage points.

“Instead, we anticipate the government’s budgetary position will continue strengthening thanks to a gradual reduction in unemployment benefits and an increase in cyclical revenue items amid the economic recovery. The upcoming 2018 elections could, in our view, prompt a loosening of the fiscal stance toward the end of 2017. Still, we do not expect any pronounced negative deviation from the budget balance and see a rise of the budget surplus over the forecast horizon” S&P said.

It noted that the stable outlook balances its view of the upside rating potential due to improvement in economic and budgetary performance and reduction of currently high levels of NPLs against the risk of weaker growth, risks to banking sector stability and budgetary policy deviation.

Key findings of Cyprus real estate conference

RICS Cyprus real estate conferenceUNFORTUNATELY I was unable to attend a recent real estate conference in Nicosia that discussed the state of the Cyprus property market and the management of REOs and NPLs.

But I received a summary of the event and key findings from Liana Toumazou, RICS Country Manager for Cyprus and Hellas, which I have published together with the presentation material below:

The event brought together real estate professionals, banking executives and regulators to explore and discuss the state of the Cyprus real estate market as well as strategies for the management of REO and NPL portfolios.

Shifting fundamentals in Cyprus real estate market

Pavlos Loizou MRICS Chairman of RICS in Cyprus and Partner at Resolute Asset Management, highlighted that the new ability of financial institutions to create large real estate portfolios will attract overseas institutional investors seeking large portfolio purchases.

In light of the upcoming stress tests for financial institutions, the size of the NPL and REO problem in Cyprus will result in more scrutiny on real estate professionals.

Mr Loizou called for improved data analytics and the need for strict standards in preparing valuation reports.

Download: The shifting fundamentals of the Cyprus real estate market

Cyprus real estate market and expectations

Thomas Dimopoulos MRICS Lecturer at Neapolis University Paphos, expressed optimism that the market is picking up pace towards full recovery.

He identified Cyprus as one of the top performers in Europe and attributed this success to the various naturalization programmes introduced in recent years.

However, Mr Dimopoulos emphasized that a potential termination of such programmes in the future would be detrimental to the real estate market and would have repercussions on the banking sector as well.

Download: Cyprus Real Estate Market & Expectations

Valuations for owners of real estate assets

Jennifer Sharpe Manager Property Valuations at Philoktimatiki Public Ltd, outlined the requirements that real estate valuers must follow when producing valuation reports.

She emphasized the need to have complete information and limit assumptions, so as to ensure the accuracy of the valuation.

Download: Scrutinizing, assessing, and utilizing valuations made for owners of real estate assets

Regulations governing NPL management

Vassilios Vrachimis Partner at PricewaterhouseCoopers, discussed the changing regulation which will allow banks to foreclose assets more quickly and transparently, thus accelerating recovery.

He also noted that external monitoring will become increasingly intrusive and will cause banks to look at collaterals with much more scrutiny.

Download: Regulations Governing NPL Management

Asset management platforms for REO portfolios

Jon Hodnett Partner at Resolute Asset Management, outlined the advantages and the challenges banks face when managing large portfolios of real estate, which are one of the highest risk categories for banks.

He presented Resolute’s framework approach for converting non-performing exposures to cash recovery.

Mr Hodnett also demonstrated the REO management platform developed and used by Resolute to manage their clients’ portfolios.

Download: Setting up asset management platforms for REO portfolios

NPL management at Bank of Cyprus

Anthi Exadaktylou (Bank of Cyprus) praised the success of the Bank of Cyprus to deleverage its non-performing exposures from €15bn in 2014 to €10.5bn today.

Consensual debt for asset swap was cited as the most preferred method for resolution because it delivers immediate relief both for the bank and the client.

Ms Exadaktylou assured the audience that the bank does not intend to foreclose on primary residencies. She invited struggling customers to reach out to their banker and find a reasonable, mutually beneficial solution.

Editor’s note

Real Estate Owned (REO) is property owned by a bank that it has acquired with the mutual consent of its owner (e.g. debt for asset swaps) or without the owners mutual consent (enforcement).

MPs seek sewerage rate reduction

Cypriot MPs seek sewerage rate reductionMPS ARE HOPING that a bill reducing sewerage rates will go to the plenum by the end of the month.

The proposal aims to recalibrate the applicable sewerage rates because, as the rates now stand, the amount payable to local authorities would shoot through the roof due to the updating of property values.

Sewerage rates are calculated based on the market value of a property.

The matter was discussed on Monday at the House Interior Committee.

As part of Cyprus’ bailout agreement with international lenders, authorities here completed the revaluation of some half a million properties in 2014.

As a result, Immovable Property Tax (IPT) was to be paid based on up-to-date values (2013); however the new rates were never actually levied.

Despite the property revaluation, IPT paid for 2015 and 2016 was still based on the market value of properties as at 1st of January 1980.

And last year, a law was passed slashing IPT payable for 2016 by 75 per cent. Additionally, MPs voted to scrap IPT altogether thereafter.

But sewerage rates continue to be based on a property’s market value – the updated 2013 values.

By way of example, a property previously valued at €50,000 would pay around €260 in sewerage fees annually.

The same property could now be valued at, say, €280,000.

This means the applicable sewerage fee would also have to be increased by several factors – unless the rates were recalibrated, which is the purpose of the bill under discussion.

Disy MP Nicos Nouris said the goal was to lower the sewerage rates so as not to overburden property owners.

But, he added, those owners who were found to have concealed the true value of their properties would be penalised and charged more than the rest.

Editor’s note

Currently sewerage rates in Cyprus  vary from 0.3% to 0.7%.

For example in the area covered by the Paphos Sewerage Board the rate is 0.5%, comprising a sewerage charge of 0.4% and a drainage charge of 0.1%.

Annual sewerage charges for a house in Paphos with a 1980 taxable value of €60,000 would be:

Sewerage: € 240
Drainage: € 60
Total: € 300

However, the same property could now have a taxable value in the region of €400,000 following the revaluation exercise carried out by the Department of Lands and Surveys in 2013. Unless the rates are adjusted to compensate for the increase, the annual sewerage charges will be:

Sewerage: € 1,600
Drainage: € 400
Total: € 2,000

 

Paphos marina faces further delays

FEARS have been expressed over Paphos Grand Marina going ahead after it has experienced a further delay following a decision by the authorities to refer the matter to the attorney-general.

“The committee is passing all of the documents on to him to check his legal opinion and that everything is in order,” said community leader of Kissonerga George Stylianou, referring to the administrative committee that manages marinas, which met on Monday.

Stylianou expressed his concern over the move, hoping that it wouldn’t lead to further delays in the project getting off the ground.

“The attorney-general must proceed with this case as a matter of urgency and it should not take more than a month,” he said.

He expressed the worry that if it took longer it could lead to a permanent delay in the project which has been plagued by delays for more than a decade.

“This is halting our plans as a community and we cannot wait any longer,” he said. “Should we count on the financial income from the marina or not?”

The marina at Potima bay between Kissonerga and Peyia will be a crucial project for Paphos. When finally built, it will cover an area of 155,000m² and have a capacity of 1,000 berths. The project will take approximately three years to be completed.

The latest move is the last in a long line of problems.

The project had been frozen since litigation began after it was awarded in 2008.

Following the announcement of the tender for the project in 2007, the project was initially awarded to the Cybarco-Pandora consortium of which the Leptos Group was a part in 2008. However, the other two consortiums that had bid for the project,

Poseidon Grand Marina (which includes Aristo) and Pafilia, challenged the award.

According to the terms of the tender, the chosen consortium must prove 60 per cent of funds are secured. The Poseidon project has a total cost of €215 million.

Although proof of funding was submitted on time some technical problems remained.

At Monday’s meeting the contract with Poseidon was expected to have been signed.

[youtube=https://www.youtube.com/watch?v=3eYCIzWJLzE&w=470&rel=0]

Building permit regulations to be re-examined

INTERIOR minister Socratis Hasikos will hold another round of consultations with parliament and the public over the government’s policy on issuing building permits outside residential areas, he said on Monday.

After attending a House interior committee session, Hasikos defended his decree from last November, regulating the process of obtaining a derogation in order to build a house in non-residential areas.

Previously, decision-making rested with the Town Planning Department but no criteria had been set, leading to unregulated construction.

The minister’s decree allows for the construction of a home for own use, within a 500-metre radius from the boundaries of residential areas, and provided the structure has access to all basic utilities – road access, electricity and water lines.

This arrangement, designed to curb profiteering in non-residential areas by land developers, was met with resistance from parliament, which argued that it sharply reduces the value of non-residential land.

“What has been agreed with the committee today is that a new meeting will be arranged, and where the policy can be improved, in light of the objections raised, it will be,” Hasikos said.

Describing the effects of the previous regime, the minister said land developers routinely bought non-residential land from poor people and created residences and luxury houses, which they then sold at very high prices.

Hasikos dismissed another objection raised – that the new policy may adversely impact banks’ balance sheets, as much of the devalued land is already used as collateral in loans taken out – saying that, according to his information from the Co-operative Central Bank there is no risk from such loans due to this policy.

Under the previous rules, he added, whereby there were in fact no rules, many people “built everywhere and without control”.

Now, Hasikos noted, even if someone is rejected by the Town Planning Department, they may apply for a derogation.

“This is why I told the deputies to choose whom they wish to serve – the public or land developers,” he said.

In parliament, Hasikos’ policy found support only in the Green party, while even Disy – the minister’s party – voiced reservations.

“The issue is that many land owners see the value of their land diminished greatly,” Disy MP Andreas Kyprianou said.

“A balance needs to be found because unfortunately many of these properties are mortgaged to banks at previous, much higher values.”

Diko deputy Charalambos Pittokopitis described Hasikos’ decree as “unacceptable”, saying it “essentially decimates”, instead of supporting, poor people.

“We believe such policies serve big capital, with the public bearing the brunt in the end,” he said.

Pittokopitis called on the government to withdraw the decree, revert to the previous regime, and then kickstart a dialogue for the optimum solution.

“If we don’t receive satisfactory answers, we will seek a meeting with the president on this issue,” he warned.

His remarks were met with Hasikos’ ire.

“This deputy is misleading the public and pandering dangerously,” he said.

“If his proposal were to be adopted, the poor people would take a hit and a state of affairs that benefits land developers would return.”

The minister was also unimpressed with the deputy’s threat of going over his head.

“I execute policy set by cabinet decisions,” Hasikos said.

“If he wants to go to the president, he should – I’ll be there, too. He should make these threats to others, not me.”

Concerns over massive Peyia project

CONCERNS are being raised over the project at Ayia Vouni (Sacred Mountain), which is being pitched as green and sustainable, and will be built next to the protected Pikni forest; a small part will also fall within the Natura 2000 network.

This is the first time that this sort of development has been proposed in Cyprus since changes were introduced to building policy in 2014, which concerns the promotion, regulation and control of a new type of development in the countryside – ‘integrated development of multiple and large uses’-which aims to provide increased building efficiency.

Environmentalists and members of the public attended a council meeting in Peyia on Wednesday to observe a presentation given by representatives of the projects’ developer, former president of the Republic of Cyprus, George Vassiliou.

Vassiliou acquired around 330,000m2 in Peyia and the design is described as a ‘sustainable development project and a near zero energy settlement’. The project is receiving one million euros funding from the EU as part of the Zero energy initiative.

However, Klitos Papastylianou of the ‘initiative for the natural coastline and commons of Cyprus’, attended the meeting and said that he believes that the development should not go ahead as it poses a number of negative impacts.

“Some months ago, ahead of the meeting, we raised some concerns with the environmental impact assessment and filed an objection. According to the law on assessing there is a definition of the environment; water, climate, habitat and so on. This project is unsustainable on almost all aspects.”

Papastylianou said that under the regulations, the investor has to meet certain criteria for the project concerning the ‘strategic use’ and ‘secondary use’, the latter should be a far smaller percentage. However, he said in this case it is not.

“The strategic uses are the rehabilitation centre (medical) and a research and development centre (technology, environment and energy consumption) and make up only 5% of this project, whereas the secondary uses, such as the village centre- with bars, restaurants, banks, shops and a gallery- as well as infrastructure, such as, roads, small dams, a waste treatment plant and residential development, will account for 95%.”

In the last year, Peyia council has twice raised documented concerns over the development and requested that the town planning department refrain from issuing any permits be approved until all of the necessary studies have been completed and examined.

Some of the concerns raised include height of buildings, possible landslides and flooding, water supply and public access roads.

Peyia councillor Linda Leblanc said that the meeting raised a number of questions and the council will again write of their concerns to the planning department.

The Nicosia planning department is responsible for granting permission for the development, although Peyia is responsible for issuing a building permit if the project gets the go ahead, she said.

The area proposed for the project falls outside the designated building zone, is on a steep slope and will include four storey high apartment blocks (145 units) and 125 villas. It is planned to be constructed in two phases

3,000 buildings in Peyia empty

Papastylianou said that as there are currently already around 6,500 buildings in Peyia with 3,000 or so already lying empty, it is nonsensical to create more buildings. He also questioned how these would then be rented or sold.

A spokesman for the company carrying out the studies, environmental consultants I.A.CO Ltd said that there would be no ‘significant impact’ on the flora and fauna in the protected area.

“Only 0.25m2 is inside the Natura 2000 area and there won’t be a significant impact on the flora and fauna there.”

He said that a geotechnical study was also carried out to identify the areas that have some geo instability. “From the entire area of the project, only 5% have some issues, such as unstable rocks.”

In other areas, he said that the bed rock is suitable and ‘stable for the development.’ However, he said that some measures must be taken during construction.

“This is nothing unusual, we have studied the area and there isn’t any reasons for concern. There are solutions to stabilise the area during construction.”

He said that these geotechnical solutions would be further investigated during construction.

Papastylianou said that although the company are recognising the impact of the project, they are also claiming that there will also be a positive impact by creating new jobs and helping the construction sector.

“How can you say that this is a positive impact on the socioeconomics of an area when half the buildings in Peyia are already empty?”

Irreversible negative environmental impact

He said it is clear that the natural environment will suffer a severe negative and irreversible impact, and not just Ayiou Vouni, but the entire area.

“The same can be said for the landscape, as the development is on a mountain top and will be seen from all over Peyia. The mountain will be transformed instead of protected.”

There are also concerns that there will be a huge impact on water resources, and the environmentalist said this raises the question, does the water development department have enough water to supply the area? One fourth of the existing consumption will be added by the project, he said.

“According to the relevant study, the development will need 30 tonnes of water per hour, the allowance for all of Peyia is currently 120 tonnes.”

Serious geological concerns

There are also serious concerns of the geology of the area, on the East is the Skali river and in the South West the Sterarkakon, both areas are characterised by landslides. There is a risk of escalation of this phenomenon in the study, he said.

Environmentalists also say there will be a total transformation of the morphology of the area, as there will be excavation and cutting down of trees.

“It is currently an untouched pristine natural environment and it will be totally destroyed and almost half of it sealed by concrete.”

Leblanc said there were also concerns over proposed green areas and public access as the hillside is so steep with only one entrance and exit road.

“We were also told that 43 million euros would come to Peyia as direct benefits, such as taxes and so on, and 126 million euros in indirect benefits. We will be asking questions at the council,” she said.