MEP questions permits for real estate investments

Nigel Howarth
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7

MEP TIMOTHY Kirkhope is concerned that Cyprus, together with a number of other EU member states, is offering temporary residence permits to non-EU citizens investing in real estate and has raised the following question in the European Parliament.

Question for oral answer O-000108/2013
to the Commission
Rule 115
Timothy Kirkhope, on behalf of the ECR Group

Subject: Schengen area residence permits for third-country nationals investing in real estate  

Several Member States (Bulgaria, Greece, Cyprus, Latvia, Portugal and Spain) are issuing temporary residence permits to third-country nationals who invest in real estate in these countries. In most cases, the temporary permits can later be transformed into permanent residence permits for the Schengen area. The number of permits issued under such investment programmes is growing rapidly, as is the number of issuing Member States. In fact, these countries have begun to compete with each other to create ever-softer and -easier conditions for obtaining residence permits in exchange for investment in real estate.

Such investment programmes have had several negative consequences: for example, in some countries external demand is distorting the housing market, artificially inflating real estate prices and generating fierce competition for commercial loans for the local resident population. This is contrary to the proposal for a directive on credit agreements relating to residential property (COM(2011)0142).

According to information from national law enforcement bodies, these arrangements are not always transparent or properly controlled, and may facilitate money laundering. Furthermore, they allow undesirable persons to gain residence in the Schengen area. Commercial activities linked to the granting of residence permits have become a lucrative business for narrow interest groups such as certain banks, consultancies and real estate companies, and this business is taking place at the expense of safety across the entire Schengen area.

1. Is the Commission aware that granting Schengen residence permits has become a profitable business model created by the authorities of some Member States?

2. How does the Commission view the fact that these very diverse procedures for the granting of residence permits across the Member States have a direct impact on access to the whole Schengen area, while being subject to different levels of transparency and control and different investment thresholds? How does the Commission view this in terms of the long-term stability and sustainability of the Schengen area?

3. Would the Commission consider taking any action on the matter, such as setting minimum criteria for obtaining Schengen residence permits, bearing in mind that permit recipients often do not reside in the issuing countries and move freely across the Schengen area, and that these practices cause obvious distortions in the housing market?

About Timothy Kirkhope

Timothy John Robert Kirkhope is a British lawyer and politician, currently serving as Member of the European Parliament for Yorkshire and the Humber for the Conservative Party.

After serving for ten years as Member of Parliament for Leeds North East, he was first elected to the European Parliament in 1999.

Bank of Cyprus reports €2.2 billion net loss in 2012

Nigel Howarth
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11

BANK of Cyprus (BoC) on Friday announced a €2.2 billion net loss for 2012 on rising provisions for loans and declining profits, up more than 60 per cent on its 2011 losses.

In its financial results, the bank said that “Provisions for impairment of loans and advances have increased significantly (€2.306 million in 2012, compared with €426 million in 2011), reflecting the deterioration in the quality of the loan portfolio and the declining collateral values.

“Loss after tax for 2012, including the impairment of Greek Government Bonds (GGBs) (€188 million), the impairment of goodwill and other intangible assets (€360 million) and the restructuring costs (€21 million), reached €2.214 million compared to €1.359 million for 2011.”

Its non-performing loans ratio at 31 December 2012 reached 23.7%, compared to 10.2% at 31 December 2011. In addition, the events of March 2013 are expected to cause further declines in collateral values. These factors are reflected in the significantly higher levels of provisions for impairment of loans, with accumulated provisions for impairment of loans reaching €3.7 billion and the provision coverage ratio of non-performing loans amounting to 55%.

The bank warned that more borrowers are expected to default, while collateral values are expected to fall even further, leading to increased levels of non-performing loans and provisions for impairment.

The Bank’s Board of Directors believes that the Group is taking all the necessary measures to maintain its viability and the development of its business in the current business and economic environment. However, a number of uncertainties remain:

  • The recession may be more severe than envisaged in the macroeconomic scenario which formed the basis for the estimation of future credit losses for the recapitalisation of the Group.
  • The liquidity situation is impacted by the level of confidence in the banking system and the period over which the restrictive measures and capital controls are in place. The Group currently has limited access to interbank and wholesale markets which, combined with a reduction in deposits in Cyprus, has resulted in increased reliance on Eurosystem funding.
  • The Group is exposed to litigation and claims mainly relating to the bail-in of depositors and the absorption of losses by the holders of equity and debt instruments of the Company.

The bank’s core tier 1 ratio (a measure of a bank’s financial health) sank to minus 1.9 per cent by the end of 2012, way below the EU-mandated level of 9 per cent.

Further reading

Bank Of Cyprus Group – Annual Financial Report for the year ended 31 December 2012

‘Rents in free-fall’ say property owners

Stefanos Evripidou
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4

IF WE want to see property ownership becoming a privilege of the few, then leave things as they are, said head of the Cyprus Property Owners’ Association Giorgos Strovolides yesterday.

During the association’s general assembly, Strovolides expressed deep concern for the future of the property market noting the flight of investors.

He warned that all the talk of legal regulation of rents and increased taxes was creating a negative environment for the property market and property owners who have seen a massive drop in rent revenue and the value of their properties.

Strovolides questioned efforts to reduce rents by law since owners have already voluntarily reduced rents by 50 to 60 per cent.

“Rents are collapsing and who is seeking protection? Not the owner, but POVEK (small shopkeepers union) and they are actually being heard by some,” he said.

What’s there to discuss when rents are in free-fall, he added.

Although legally regulating the rental market could actually halt the decline in rents, the association is in favour of letting the market and the laws of supply and demand set prices, said the association head.

Regarding the immovable property tax (IPT), he called for a simplified and fairer system of taxing property and recommended a uniform rate without any exemption and taxed per property, not per owner.

He further asked the government to clarify how much revenue it wanted to collect from this tax.

“What’s the target (on IPT), €100m, €150m, €200m?”

He suggested reducing capital gains tax from 20 per cent to 10 per cent, increasing the non-taxable amount, and abolishing transfer fees when there is VAT.

Strovolides also called for the abolition of tax on rents since landlords are the only ones who get taxed double in terms of income tax and the defence contribution they have to make.

“If what we want to see is property ownership to be the privilege of a few again, then we can leave things as they are. If we want to preserve the right to immovable property ownership, whether that is a residence, holiday home or investment, for the many then certain measures have to be taken in that direction,” he said.

He called for increased dialogue on the issue.

Rents in fre-fall says property owners chief

Real estate roundup

Nigel Howarth
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1

THE BANK of Cyprus has introduced a new housing loan scheme aimed at permanent residents of the island for the purpose of buying a house as a permanent or holiday residence.

The scheme provides for a loan of up to €200,000 at an interest rate of 4.75% with a repayment period of 10 to 40 years.

It offers the right to suspend instalments of a maximum of two monthly instalments a year and 24 suspended instalments in total over the duration of the loan and a grace period of up to 24 months on capital – or up to 24 months on capital and interest if the house is under construction.

There is also a reward for consistent repayment with a lower monthly instalment every 13 months, provided that all 12 previous instalments had been paid on the due date.

The Bank is also offering a discount of 0.25% on the interest rate is the residence is purchased from a developer who is client of the bank and the construction has been financed by the bank.

Immovable Property Tax collection

CHIEF Revenue Officer, Mrs Liana Charalambous Tanou, has reported that the Inland Revenue Department completed the task of sending out Immovable Property Tax notices to known addresses days ago.

However a number of people have complained that they have not received their bill (considering that around 200,000 tax notices have been sent out, this is hardly surprising bearing in mind the often reported problems with Christmas mail deliveries).

Mrs Charalambous has urged people who have not received their tax notices to visit their Inland Revenue Department office and settle their IPT in person. Those paying after 15th November will be charged a 10% penalty plus a pro-rata 4.75% annual interest rate charge.

As of last Friday approximately €31 million Immovable Property Tax had been collected.

FIFA land deal investigation

AMERICAN lawyer Michael Garcia will be looking into a £27 million land deal in Cyprus involving a member of FIFA’s executive committee and Qatar’s sovereign wealth fund.

This is one of several lines of inquiry into allegations of World Cup corruption being investigated by Garcia, the chief investigator of FIFA’s ethics committee.

He will be looking into the way Executive Committee member Marios Lefkaritis became involved in several trade deals with Qatar regarding oil and land.

Lefkaritis was one of 22 FIFA executive committee members who voted on the locations of the 2018 and 2022 World Cup tournaments in December 2010, and voted for Qatar for 2022.

In 2011 a plot of land reported to be owned by the Lefkaritis family in Cyprus was sold to Qatar’s sovereign wealth fund, Qatar Investment Authority, for €32 million.

One of Garcia’s tasks is to investigate whether there was any ethical violation by any party involved in bidding for the two World Cups – especially violations involving Executive Committee voters.

Yesterday Mr Lefkaritis vehemently denied any wrong-doing following the report that first appeared in the UK’s Daily Mail newspaper.

The importance of property rights

Pavlos Loizou MRICS VRS
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7

THE DEFINITION of Market Value is the amount someone would pay you to own what you have. Leaving aside how Market Value is calculated, this statement makes two fundamental assumptions: (i) that you actually own the asset in the first place and (ii) that you can transfer its ownership.

These may seem rather obvious, but ownership is not always guaranteed. With property rights being an essential part to facilitate economic growth, their lack can create serious complications in the working of the economy and of business in general.

Property rights are effectively a bundle of rights that include the right to use the good, to earn income from it, to transfer the good to others and to enforce your property rights. In a nutshell this means that you have guaranteed ownership and control over the asset, for you to do with it pretty much whatever you please.

In real estate, property rights, and in particular ownership, typically come in the form of a Title Deed. Title Deeds or lack thereof, are a sore point of the Cyprus real estate market having gone from being one of the best selling points of acquiring real estate on the island to the prodigious evil for all those involved in the sector.

The problems stem from two very different sources:

Firstly, Cyprus suffers from land fragmentation and from ownership of a site being divided amongst various owners in the form of shared ownership. These ownerships / Title Deeds are highly illiquid as no one wants to own part of a property, as you have to consult with others in deciding what to do with your own asset limiting development options and uses of the property.

Secondly, in order for a Title Deed to be divided, say a Title Deed of a plot of land into ten Title Deeds representing the apartments that have been constructed upon it, the building must receive a Certificate of Final Approval that it has been constructed according to the relevant permits and that all property taxes relating to this property are paid prior to the division of the Title Deed.

With the relevant government departments taking their time to inspect properties due to inefficiencies and a backlog of buildings, laws that are too rigid to allow for problem solving that result in stalling or dead-ends, and the economic crisis causing inability to developers/owners to pay their taxes, it is close to impossible to issue Title Deeds under the current system.

The lack of Title Deeds is important, as it means that property rights are not protected – both for the owner and the financial institution that has granted a loan using a property as collateral.

Question No. 1 – In the example above, who is the owner of the flat? The person who owns the land on which the building has been constructed or the person who deposited their purchase contract at the Land Registry that they have bought that flat? According to the current regime of calculating the Immovable Property Tax (IPT), the owner is the one to “whose name” or “to whom” the Title Deed is registered to. Hence the mess with how IPT should be calculated and levied.

Question No 2 – If a property does not have a Title Deed how can a bank foreclose on the asset in the case of default? The law allows for lenders to go to court in order to foreclose on a property, whereby the Land Registry will sell the property at an auction in order for the lender to recover its debt. However, the Land Registry cannot sell something which has no Title Deed because it will not be able to transfer that property’s rights to someone else.

Question No 3 – For risk assessment purposes, what is the value of the collateral of a loan for which the collateral is a property with no Title Deed? I think that the answer is clear from answering question two above.

Cyprus’ ticking time bomb

Nirvana’s final studio album, their masterpiece ‘In Utero’, turns 20 this September. After listening to Kurt Cobain, YouTube proposed a number of songs based on my previous choices.

With PIMCO’s and KPMG’s reports assuming SME’s non-performing loans rising to 57% and 45% respectively for 2013, the most suitable song that describes what will happen if the lack of property rights isn’t tackled very soon is Will Smith’s, ‘Boom! Shake the room’. You can listen to below or be reminded that its refrain, which goes: ‘Boom! Shake-shake-shake the room, Boom! Shake-shake-shake the room, Tic-tic-tic-tic boom!’.

Pavlos Loizou
Managing Partner | Real Estate Advisory
Leaf Research
[email protected]

BBC Money Box: Cyprus property troubles

Nigel Howarth
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13

HUNDREDS of British people who bought properties in Cyprus are hoping that a court case on the island later this month will see their liabilities written off.

They are in dispute with the property developer and Cypriot banks about mortgages taken out to buy homes between 2005 and 2008. The mortgages were in Swiss Francs and their debts and repayments have doubled – mainly due to currency changes.

In the program, Money Box reporter Bob Howard talks to ‘Tim’ who was tempted to buy off-plan in a Cyprus development after he was cold-called by a salesman in 2005.

Tim bought two 2-bedroom apartments in the development that were priced at CYP 109,000 (approximately £120,000) each. The developers recommended a local lawyer to ‘Tim’ who they said knew the Cypriot legal system – but instead of taking out a mortgage in Cypriot Pounds, ‘Tim’ was told that the most affordable option was to take one out in Swiss Francs.

But when the Swiss Franc strengthened against Sterling ‘Tim’, alongside hundreds of other British investors, found himself in trouble. But he only discovered to what extent when, in 2009, he visited Cyprus to see the newly-built apartments.

Last year, after taking further legal advice, he was told to stop making the payments in order to take court action for alleged mis-selling against his Cypriot lawyer and the banks which had lent him the money.

The banks cancelled his loan and have promised legal action of their own. And the money they say Tim owes keeps rising. The banks want an immediate payment of half a million Swiss Francs (approximately £380,000).

Money Box presenter Paul Lewis talks to Neil Heaney (CEO of Judicare) and John Howell (editor of the Overseas Property Professional magazine).

Listen to the Money Box report – Cyprus property troubles:

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