TO MAKE a frappe you need water, coffee, a shaker, ice cubes, a tall glass and a straw. The total cost of these items is about €0.30, and its retail price about €2.00 – €3.00. If you leave the frappe sitting in the sun for an hour, then the ice cubes will melt, the foam will go down and the coffee will taste bitter. Its retail price now will be almost nil.

A building is much like a frappe. Its value, if the developer has done his job right, is more than the aggregate cost of its components. Leaving market forces aside, if the building is left unattended or is undermanaged, then it will progressively deteriorate, both physically and economically. The lack of maintenance will create increasingly higher repair and operational costs, which combined with limited contact with tenants, both current or prospective, will result in a built-up in grievances and to lease terminations.

A ‘Minsky Moment’ is a sudden collapse of asset values, where such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. High debt levels and a decrease in demand, leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to sustain the debt they took on to acquire them, with losses on such assets prompting lenders to call in their loans. As investors and banks look to exit their respective positions, no counterparty can be found to bid at the high asking prices previously quoted. This progressively leads to a precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity and a severe demand for cash. Exiting at this point can only be done if one is willing to incur the maximum level of losses.

At the end of Cyprus’ ‘Minsky Moment’ banks will end up being the owners or economic owners of a sway of assets ranging from individual plots of land to sizeable commercial assets. Commercial assets with an operational component, such as hotels, malls, multi-tenanted buildings, etc., pose particular challenges as they require hands-on asset management or else their value will deteriorate further. Assets also have various holding costs running in the background, e.g. maintenance, insurance, property taxes, as well as physical deterioration due to natural wear and tear and vandalism. For operational assets the need to act is even more pronounced as any significant or prolonged disturbance in the operation/business side, is likely to have a heightened impact on the asset’s value, for example if tour operators fear that a leisure property may close down they could terminate their contracts or divert tourists elsewhere.

In order to add value and improve liquidity, the asset manager needs to employ an “Owner Mentality” in order to tackle the gamut of issues that relate to each asset. This requires first-hand knowledge of the real estate itself, a principle often forgotten in more “transaction-based” environments. Banks need to employ this “Owner Mentality” in order to appreciate the range of factors that affect their real estate assets and maximize value by resolving problems and taking value-add steps before putting assets on the market. This will help them reduce their losses, maximize liquidity, and structure their disposal strategy in a more capital efficient manner.

Pavlos Loizou
Partner (Greece & Cyprus)
Resolute Asset Management