The MoU and its impact on banking and real estate

George Mountis BSc, MSc, Ph.D
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THE banking sector will be severely affected by the deflation in prices and activity in the real estate sector, both at retail and corporate levels.

Property prices rose significantly between 2004-2008 as banks over-lent to local households, overseas investors and property developers by looking at asset/collateral values rather than the repayability potential of the loans. The combination of a decrease in overseas demand in 2008 with a significant amount of stock in the development pipeline, resulted in a decrease in property prices especially post 2009. The latter has had a negative knock-on effect on a number of construction related companies, a number of banks who financed them and the buyers of the end-product. The situation has been further complicated by delays in issuing title deeds and the use of properties that have been developed/sold by their original owners for collateral purposes, often cross-collateralising assets across loan facilities and companies.

All of these have (and will) have a negative impact on business activity and employment. It will also affect confidence among mortgage borrowers, the ability of companies to borrow against property and use it as collateral to finance investment, and the ability of property developers to service existing loans. Thus, a large number of borrowers (developers, investors and individual buyers) are currently entering into ‘negative equity’ causing significant structural and economic implications.

Today, many borrowers are repaying mortgages that are essentially higher than their asset value. To the local banks, this means that their exposure to potential loses has increased further, especially when more and more loans become problematic and in arrears. What is worrisome is that if banks are forced, as envisaged in the Memorandum of Understanding (MoU) with our international lenders, to foreclose on properties, this will open Pandora’s box as procedural/legal issues will appear, losses will be crystallised, and collateral values may drop further due to the number of units coming onto the market as forced sales.

As the boom in the real estate sector was supported by strong credit expansion, this significantly increased the exposure of domestic banks to developments in the real estate sector. Loans to individuals for housing increased considerably in recent years (Cyprus has the highest household debt/GDP in the EU). Therefore, over-lending in the domestic real estate sector created several structural problems. Many property developers and investors are not in a position to repay their loan obligations as they struggle to dispose of their properties/assets, mainly due to uncertainty caused by the turmoil in the local and international markets and lack of financing from local banks to potential buyers (as banks are undercapitalised and are pursuing deleveraging strategies in tandem).

The decisions of the Eurogroup on March 25 outlined a number of prerequisites in order for Cyprus to gain assistance from the troika (ECB, EU and IMF). Through the MoU, several structural changes will positively reshape the financial and real estate sectors in the medium to longer term. Firstly, administrative hurdles and the legislative framework currently constraining the foreclosure and sale of loan collateral will be amended so that the property pledged as collateral can be foreclosed within a maximum time-span of 1.5 years from the initiation of legal proceedings. In the case of primary residences, this time-span could be extended up to 2 years.

It is stated in the MoU that the necessary legislative changes will be implemented by end of 2013, macroeconomic conditions permitting.

Secondly, the government is in the process of raising the Immovable Property Tax (IPT) and it has already announced that it’s going to revise it further over the next six months. It is widely acknowledged that real estate is one of the easiest assets to tax, as there is a central registry of owners and assets (the land registry). Such taxation and the limited access to funding (as banks are unable/unwilling to lend) will push prices and demand to even lower levels.

Thirdly, the central bank will implement a property price index that establishes the average property market valuation by square metre of habitable surface and land plot. This index shall be operational to provide imputed market valuations for each non-agricultural cadastral plot.

Fourthly, amendments will be made to provide for mandatory registration of sales contracts for immovable property and eliminate the backlog in issuing title deeds to less than 2,000 cases.

Fifthly, the authorities will also enhance cooperation with the financial sector to ensure the swift clearing of encumbrances on title deeds to be transferred to purchasers of immovable property, and implement guaranteed timeframes for issuing building certificates and title deeds. The government will also need to implement electronic access to the registries of title deeds, mortgages, sales contracts and cadastre for the financial sector and government services.

Finally, the authorities shall assess the need for additional measures, including if necessary legislative reforms – to eliminate court backlogs by end of the programme.

Cyprus’ economy was in a downward spiral for two to three years, so it would be unfair to argue that the MoU is to blame for the decline in property values and demand. Before the memorandum, compared to 2007, property prices in Paphos, Famagusta and Larnaca had fallen by up to 40-50 per cent, while Limassol and Nicosia had a downward path from 2011 onwards with reductions of about 20 to 25 per cent (Leaf Research, 2013). With the signing of the MoU the market has been ‘frozen’ and it is anticipated that the prices will drop further as the affordability ratio of net income to house prices is further strained.

Nevertheless, all these MoU reforms are in the right direction towards creating a reliable and dynamic financial and real estate sector. Yes, heavy austerity and recession might be in place for the next few years and everyone agrees that after such a severe blow to Cyprus’ lucrative banking sector the country will be pushed into a deep recession. Perhaps the issue one should consider is what would have happened had all these reforms that Cyprus needed for years already been undertaken, making its financial and real estate sectors stronger and more transparent.

And yes, various investors from overseas have already started arriving on the island, looking at opportunities to invest in anything from large-scale real estate projects, operating hotels and acquiring non-performing loans, etc. They have seen this scenario play out elsewhere and they know that in two/three years the economy will start growing again, provided that the country streamlines its public sector, strengthens its supervisory bodies and restructures its banking industry. Cypriots will now be left to benefit from providing services to these new foreign end buyers, and, in time, are likely to realise that had they spent more time scrutinising their government and dealing with their problems rather than pushing them under the carpet, Cyprus would be a much better place to live.

Dr George Mountis
Partner | Banking advisory | Leaf Research
[email protected]
www.leafresearch.com

How long is the long-run?

Pavlos Loizou MRICS VRS
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WHENEVER economists talk, they always mention the terms ‘short-run’ and the ‘long–run’. Typically, good or bad things happen in the short-run, whilst in the long-run somehow magically all things are fixed or become balanced again.

One could argue that the long-run is just a series of consecutive short-runs, which makes our assumption that in the long run everything will be OK nothing more than our mind’s way of providing us with a positive outcome in a world filled with uncertainty and turbulence. This also explains why economists are great at rationalising things after they have happened; only telling us when the storm has past that the ocean is flat again. Cynics of course will remember that Keynes said that the long run doesn’t matter, because by then we are all dead.

Thinking about these things is more than pure semantics; when trying to make an assessment of the current situation in Cyprus, it’s easy to get trapped thinking about just the short-run or just the long-run. Those wanting to paint a gloomy picture focus on the uncertainty regarding the survival of the (new) Bank of Cyprus, the lack of action by the government, and the on-going feud between the Central Bank, government, and political parties. Those wanting to put a positive spin focus on the long-run, pointing to the gas finds on the sea boarder with Israel, on the positive signs regarding the tourism industry, and on Cypriots coming together at times of adversity. Reality is somewhere between the two.

“F” for progress
“A” for filibustering

There are two things that need to happen by the end of the year; the stabilisation of Bank of Cyprus and the review of Cyprus’ adherence to the bail-out/bail-in terms. It is difficult to see how the bank can be stabilised without maintaining capital controls, even if the ECB provides unlimited support. People are scared because there is no stability in the country, so if they have a chance to take their money out they will take it. It’s a simple case where ones actions make sense for themselves, but if all act in the same manner the system collapses hurting all of us. As for the government, it gets an “F” for progress and an “A” in filibustering.

The problem of the Cyprus government is one of de jure and de facto decision making. De jure designates what the law says, while de facto designates what happens in practice. The de jure situation is that the President runs the country with the support of the parliament in the interests of the people, and that in this case the President comes from a pro-capitalist/ reform party. The de facto situation is that the biggest companies in Cyprus are in the construction sector and are heavily indebted. In parliament the government has a slim majority of one vote, with this majority coming from a coalition of three parties.

How can the government carry out structural reforms if its parliamentary coalition is weak and its main supporters are the ones who are most heavily indebted in a country which went bust because of too much debt? The answer is simple; it will be forced to, just like in Greece, Portugal, Spain and Ireland. The government will try to convince the Troika that it’s trying to carry out reforms; the Troika will say that it’s not; things will come to a head; and the one with the money will win. Thus, whilst we expect economic conditions to worsen and unemployment to rise to 20-23% by the year end, it is likely that reforms will only begin to materialise in 2014. By then, the pain will be much more to bear, causing the inevitable public sector pay cuts, banking sector dismissals, and tax hikes, to be much more than currently needed.

Cypriots still think that they are standing on the edge of the pool, dipping their toes in the water and wincing. In reality, they are wearing lead boots at the bottom at the deep end of the pool. And, the waiting is becoming intolerable as populist politicians refuse to do what they were voted for; to make decisions.

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

Paphos family unable to leave stricken home

Bejay Browne
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MONTHS after first defying an order banning them from their home, a Paphos family of four is still living at a stricken development in Armou that is slipping down a hillside.

The luxury development is almost deserted with Simon Phillips and his family the only permanent residents living there, despite a ban order which has been placed on all of the homes.

Phillips says he is prepared to be taken to court by the Paphos district office and would even see court action as positive move.

“At least it would be something. There is no viable alternative open to us at the moment and perhaps we would get a sympathetic judge,” Philips said.

Built by JNM developers in 2004, all of the houses have serious structural problems, from slanting floors, to the partial collapse of stairs, walls, swimming pools and patio areas. Outside drains are exposed in one garden and retaining walls have split.

The Sunday Mail attempted to contact the developers for a comment but was informed by an employee that they were ‘unavailable’. JNM has never responded to any requests for a comment on the Armou homes, despite repeated telephone calls and emails since the Mail first reported on the case 18 months ago.

A report by the chairman of Paphos’ Architects and Civil Engineers Association, Chrysostomos Italos was completed in June 2012 and has been handed over to the legal advisers of the homeowners. Italos places the blame firmly on the developer.

“The soil is still moving by millimetres according to the geological department which placed some inclinometers in the area and is carrying out tests every two weeks,” he said yesterday. “I don’t know if this is around the Philllips’ house or not but I will visit the area again this week or next to see if it is much worse or if it has stabilised at all.”

Phillips, his wife, Jen, and their two children are the only family still living at the development.

“The district office of Paphos has made repeated threats of court action against us to try and get us out of our home,” Phillips said. “They start every letter that it’s for my own safety. But we don’t have any options, so we have remained at home.”

A number of the homeowners, who live mostly in the UK, have issued separate court proceedings against the developer.

Evagoras Andreou, of the Paphos district office planning permits department said he couldn’t comment on any action being taken against the developer, merely saying that they were acting in accordance with the law.

Eight months ago homes in the complex had official ban notices placed on them stating the decree would remain in force until such time as repair works deemed necessary by the district officer were carried out. A day later, owners were informed that electricity supply to their homes would be cut but it is still connected.

The homeowner noted that no alternative accommodation has been offered and that if the family moves from their home they would end up on the street.

They paid €250,000 for their home outright and don’t have a mortgage.

Phillips says that although he admits that there are dangers and hazards at his property, he doesn’t believe that the house has moved at all in the last few months adding that he has been keeping a close eye on things.

“I have been measuring the gaps every day and they seem to have stabilised. But representatives of the district offices a couple of months ago said there is movement.”

According to Phillips, the device which reads movement is drilled into the ground at a depth of about 30 metres is 150 metres away from his property.

“This is quite far from my house, so I don’t think the results are correct for my property.”

Phillips says that if JNM were to return his investment, or provide an alternative similar property of equal value he would be satisfied.

He said: “It is very stressful living like this. But as it has been going on for so long now, we have accepted it as part of everyday life.”

He added that the situation has a massive impact on his family’s day to day life.

“We never entertain at home. We used to be very sociable, but we’re not any more.

Our children can’t have friends over to play or stay. Even though it’s not our fault it’s embarrassing to live as we do. We just don’t have an adequate expendable income to be able to rent anywhere at the moment.”

Paphos family unable to leave stricken home

Developers warned over Chinese market

Bejay Browne
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paphos-harbourDEVELOPERS in Paphos keen to get their hands on Chinese investments in property have been warned to treat potential investors fairly as complaints of cheating have already surfaced.

Until now, more 1,000 Chinese have bought properties in Cyprus. “The Chinese investors started off in Paphos and about 80 per cent of Chinese homeowners are there, the other 20 per cent is spread between the other towns,” said Huali Che, president of the Chinese friendship association in Cyprus.

But he cautioned that “a lot of Chinese people who have purchased properties in Cyprus have felt cheated and complained, whether it’s down to the agents in China or in Cyprus or the developers I can’t say.”

Many of the Chinese buying property on the island are doing so to qualify for residency permits, for which a home of €300,000 must be purchased, leading to the valuation of almost anything for around that amount.

“In the beginning they (Chinese purchasers) didn’t know anything about Cyprus; many agents were charging too much money. A property may be valued at €200,000 but they are charging more than €300,000 to the Chinese,” said Che.

“But now the average Chinese client is a lot more clued up and goes to the internet for information, approaches the embassy and so on – it’s not like in the beginning when they were just buying properties.”

China’s ambassador to Cyprus Liu Xinsheng is keen to see this investment in property develop into other areas of cooperation. “The potential is huge for broader, deeper and more fruitful cooperation,” he has said, saying that China and Cyprus are looking at the feasibility of cooperation in energy, infrastructure, financial services and shipping.

But for now many of the property developers in Paphos are looking towards the Chinese market for investment.

Aristo developers and Constantinou Bros both have Chinese language buttons on their website and Leptos Estates is looking for “Chinese speaking individuals as interpreters with the role of assisting the Leptos Estates Sales team”. Even smaller Paphos developers such as Korantina Homes say most of their current clients are from China.

But a new beachfront project under development by Pafilia has added fuel to the ‘overpricing for the Chinese market’ fire. The development at the Lighthouse area in Kato Paphos is aimed at the foreign market.

The new development is described as “contemporary” by Pafilia and one bedroom apartments start from €275,000 + VAT (five to 18 per cent depending on the buyer).

The price tag may seem a bit hefty and could be seen to be aimed at foreign investors – in particular the Chinese. But Pafilia Sales Director Simos Simillides explained the substantial price tag by pointing out that the “prime market” in Cyprus only has a few beachfront developments, as Cyprus is a small island with tough planning restrictions on beachfront locations.

“Similar developments in Limassol for example are sold at around €8,000 – €10,000 per square metre (almost three times higher than the Lighthouse).” He added: “The Lighthouse is aimed at international buyers as it represents excellent value for money at the prime location.”

Che issued a stark warning though to property agents and developers who may try to dupe Chinese clients: “There have been massive problems with the banks and some Chinese lost their money in the so called haircut. Cyprus needs to go carefully now if they want the Chinese people, they are not investing without advice now.”

Pafilia pointed out that buyers of all nationalities are careful about purchasing properties as the amount of investment involved is significant.

“We are doing lots of work explaining situation in Cyprus and conditions of property market,” Similides said and Pafilia assures that this particular project represents value for money as it is a prime location.

“This is an excellent location near the Lighthouse and Faros Beach in Kato Paphos. The Lighthouse developments border the archaeological park so unobstructed views are guaranteed. Five star hotels, the harbour and the new Mall are all only minutes away,” he added.

In the meantime, the Chinese ambassador also expressed his belief that through joint efforts, China-Cyprus relations will continue to grow from strength to strength.

He said that currently the number of Chinese citizens who come to Cyprus for investment, study and tourism is increasing and the two countries are faced with new opportunities for cooperation in trade, education and tourism.

Che agreed. He said: “The Chinese will slowly come back to invest in Cyprus. It will get better economically in three to five years.”

Chinese people who have bought properties in Cyprus complain of being cheated

Island of lost dreams for some

Nigel Howarth
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CYPRUS was the subject of a BBC World News Fast Track episode broadcast on the 15th June that reported on the impact of the financial crisis on foreigners who had chosen to live on the island.

In her opening remarks reporter Theopi Skarlatos explains how the warm climate, the relaxed lifestyle and a mostly English-speaking population had made Cyprus the perfect place for foreigners to set up home, especially over the last ten years.

But when the crisis hit the island it sent shockwaves everywhere and left some people wondering whether their life in paradise could exist for them for much longer.

The episode includes interviews with a Belgian couple who decided to spend their retirement in Cyprus, myself (Nigel Howarth), Martin Howe – a solicitor, Irena Georgiadou from the Cyprus Ministry of Finance, a neighbourhood watch group from the Paphos village of Pegeia, an Aphrodite Hills resident and Lucas Kitrou – a real estate manager.

Readers please note that some of the restrictive measures on financial transactions referred to in the report have been eased and that all funds entering or leaving Cyprus from abroad after 15 March 2013, are not subject to the restrictive measures.

[youtube=http://www.youtube.com/watch?v=itxeHYL14T4&w=470&rel=0]

Meeting of Y Liasides Developers Ltd purchasers

Editorial
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PLEASE be advised that the Paphos District Court has appointed Mr Chris Iacovides of CRI Group has the liquidator for Y Liasides Developers Ltd.

Purchasers are advised that Mr Iacovides is convening a meeting of purchasers/ investors of Y Liasides Developers Ltd properties, to discuss his strategy as to how he proposes to deal with the liquidation.

The meeting will be taking place on 28th June 2013 at 10:00am at the Amathus Beach Hotel Paphos and is being convened for the purposes of:

  1. Explaining the role of the Liquidator and providing an opportunity for purchasers/ investors to put their questions and/or concerns to Mr Iacovides and his team.
  2. To discuss the Liquidator’s remuneration, which has been agreed to be on the same basis to that charged by the Official Receiver, when acting as liquidator. A copy of the relevant legislation governing fees in included in the first enclose below. The section relevant to purchasers/investors is highlighted; your attention is drawn to the Official Receiver’s entitlement to charge 11% fees in connection with assets realised or brought to credit.
  3. Establishing committees for each development, which will assist Mr Iacovides when dealing with matters involving title deeds and/or resolving issues in connection with each development.

If purchasers are unable to attend, they are welcome to have a representative attend the meeting on their behalf.

Enclosures

Letter to all known Y Liasides Developers Ltd purchasers

Court Order ratifying appointment of Mr Chris Iacovides as liquidator of Y Liasides Developers Ltd

Published on behalf of CRI Group Ltd

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