Russia to coordinate Cyprus loan decision with EU

Editorial
-
4

FINANCE Minister Anton Siluanov told Reuters on Friday that Russia was considering Cyprus’ request for a €5 billion loan, and added that Cyprus was seeking a further €15 billion from the EU.

There was no immediate comment from authorities in Nicosia.

In June, Cyprus became the fifth country in the 17 nation euro zone to seek some form of international aid, when its banks needed state support to cover massive losses on their exposure to debt-crippled Greece.

It has repeatedly said since that a bailout figure has not yet been defined, and it was still in consultation with its would-be lenders from the European Union as well as the International Monetary Fund.

Siluanov, who this week met Jean-Claude Juncker – the chairman of the eurogroup of euro zone finance ministers and prime minister of Luxembourg – estimated Cyprus’ total borrowing needs at €15 billion.

This meant that, even if Cyprus borrowed from Russia, it would still need EU assistance.

Siluanov’s comments appeared to represent an attempt to prevent Cyprus – a popular offshore haven for Russian businesses seeking protection from their country’s unpredictable investment climate – from playing off Moscow against Brussels to secure more favourable borrowing terms.

“If we give this credit for 5 billion euro, they still will have to borrow somewhere else,” Siluanov told the Reuters Russia Investment Summit in an interview.

“Therefore, the decision needs to be coordinated, because our 5 billion is not enough for them; their (EU) 15 billion, in principle, is sufficient.”

Cyprus bailout needs

Ratings agency Standard and Poor’s has estimated that an EU rescue package for Cyprus would exceed €15 billion – or more than 80 per cent of the country’s GDP.

European officials have said previously that Cyprus’s total bailout needs could reach €10 billion.

Siluanov said that the main factor influencing Moscow’s decision on the loan is whether Cyprus can service the loan and eventually repay it.

“What will 5 billion euros give Cyprus? Will it allow it to solve its debt problems?” Siluanov said.

He also said five other European countries had asked Moscow for financial help – roughly matching the number of countries that sought aid from Russia during the 2008-2009 crisis.

“These are not large (countries),” Siluanov said, declining to name any of them.

Russia, whose low sovereign debt is more than balanced by its half a trillion dollars in foreign exchange reserves, has been a favourite stopping-off point for finance ministers of indebted countries laid low by the global financial crisis.

Russia has already lent Cyprus €2.5 billion.

But Moscow has generally resisted pleas for bilateral aid, instead supporting steps to beef up the lending power of the International Monetary Fund in return for a greater say in how the global lender of last resort is run.

[Reuters]

Alleged corruption in Cyprus property industry

Nigel Howarth
-
10

SCOTTISH MEP Ian Hudghton raised the following question in the European Parliament in July:

“A significant number of constituents have complained to the Commission and MEPs about the incidence of alleged corruption in the Cyprus property industry.

Is the Commission aware of such breaches of the law, and what action has it taken in relation to complaints about property transactions in Cyprus?”

Yesterday, in her reply to Mr Hudghton’s question EU Commission Vice President Viviane Reding wrote:

EN
E-007403/2012
Answer given by Ms Reding
on behalf of the Commission
(27.9.2012)

As regards the problems faced by a number of immovable property buyers in Cyprus who failed to receive their title deed, the Commission has already initiated measures to ensure both an effective protection of EU consumers and a correct application of EU legislation.

As an example, the Commission sent an administrative letter to the Cypriot authorities enquiring about the actions carried out at national level to address the reported problems, in particular to ensure that buyers are provided with all necessary information in order to be able to take an informed purchase decision, such as on the pre-existence of a mortgage on the property offered for sale, as required by Directive 2005/29/EC on Unfair Commercial Practices [1].

The Vice-President and Member of the Commission responsible for Justice, Fundamental rights and Citizenship also met the Cypriot Interior Minister to raise this issue.

As regards the question related to the alleged corruption in the Cypriot property industry, the Commission has not conducted any particular analysis regarding this specific matter. If the Honourable Member has specific information regarding the extent and nature of alleged corruption within this sector in Cyprus, he can provide it to the Commission. The Commission is currently working on an EU anti-corruption reporting mechanism through which all Member States’ efforts against corruption will be assessed. The first such report shall be published by the Commission in 2013, making country-specific recommendations for each Member State.

                                                  
1 OJ L 149, 11.6.2005, p. 22

Further Reading

Alleged corruption in Cyprus property industry

Property price falls reach two-year high

Nigel Howarth
-
4

THE CYPRUS Central Bank’s Residential Property Price Index for Q2 2012 reports that their index fell to 90.3; a fall of 2% compared with Q1 2012.

On a quarterly basis, house prices fell by 2.2% and apartment prices fell by 1.6% across the island. On an annual basis house prices have fallen 6.5% (their largest annual fall for two years), while apartment prices have fallen by 5.1%.

Over the quarter, Famagusta was the hardest hit area with house and apartment prices falling by 4.4% and 3.7% respectively. Paphos fared best, with house prices falling 0.5% and apartment prices falling 0.4%.

Over the year, Famagusta is again the hardest hit area, with house prices falling 12.7% and apartment prices falling 8.2%. Limassol saw the lowest fall in apartment prices at -3.6% and Nicosia saw the lowest fall in house prices at -4.6%.

The annual price falls of residential properties in the districts of Famagusta and Larnaca at 11% and 8% respectively, were the highest on record.

The Central Bank considers that the price falls, which started in Q3 2008, will continue in the short-term.

Further reading

Residential Property Price Index by the Central Bank of Cyprus for Q2 2012 (English)

Construction sector hits rock bottom

Editorial
-
24

CURRENT construction projects will run out in seven months with nothing lined up past that time, a survey released yesterday showed.

The construction business, one of the main engines driving the economy, is in free fall and the outlook appears extremely bleak, according to research by the Federation of Associations of Building Contractors (OSEOK).

Yesterday the federation released data gathered so far this year indicating that construction has been hit hard by the on-going credit crunch.

Low demand, the lack of liquidity and loans, and the general economic crisis are identified as the main culprits for the on-going slump.

The federation said its most disturbing finding was that, on average across the island, there remain an estimated seven months for pending construction projects, after which no contracts are lined up.

OSEOK said this index of contracts has been dropping steadily over the past two years and is currently at its lowest-ever point.

“The index confirms the great crisis experienced by the construction sector,” the federation said. The research, conducted with RAI Consultants, covers all the districts.

“The data shows that activity in the construction industry remained close to its lowest levels during the period April to August 2012, while chronic trends do not in the least point to recovery, on the contrary, activity is expected to continue dropping,” the federation said.

It said the problem had worsened over the past four months for contractors across the island, with more and more layoffs being recorded during this period.

At the same time consumer demand is likewise going from bad to worse. According to the contractors, its ‘Purchase-Building Index’ for a 12-month period is currently at an all-time low since it began gathering data, and demand for renovation is likewise extremely poor.

The percentage of contractors stating that their business has increased over the past four months has decreased by 56 per cent for the period April to August, according to OSEOK’s research.

The data was gathered from contractors who were asked to fill out questionnaires.

“It would appear that this index has hit rock-bottom, since many contractors cannot afford to lose more business given that they have very few, or zero, projects to work with; at the same time, government statistics show that a large number of contractors are closing shop or have already done so.”

The federation said moreover that the gloomy numbers apply to all the districts, including Nicosia and Limassol which until recently appeared to be holding up better to the financial squeeze.

The crisis in the construction industry began manifesting itself as early as 2010, when as many as 10,000 workers lost their jobs according to the federation.

Troika in moves to address Title Deed issue

Nigel Howarth
-
17

PUBLISHED in July, the European Commission paper “Macroeconomic imbalances – Cyprus” presents an insight into various aspects of the Cypriot economy and risks resulting from imbalances in the system.

The 45 page paper touches on topics that have often been reported in Cyprus Property News, including the Title Deed-cum-fraud mess.

During their investigation, the paper’s authors confirmed that “The property market in Cyprus is affected by a title-deeds problem. For a number of administrative and regulatory reasons, between 120,000 and 130,000 properties are currently lacking title deeds. The average time for obtaining a title deed is just under 12 years and more than 200,000 owners are affected by this. The title deeds problem is a significant impediment to concluding transactions in the housing market.”

The paper suggests that “procedures and regulation for building approvals and deeds should be made more efficient, to address the significant delays in issuing title deeds. Currently the long average time of obtaining a title deed is an impediment to concluding transactions in the housing market, thereby affecting the risk of the collaterals.”

Today’s InBusinessNews reports that the Troika’s draft memorandum to the Cyprus government contains many references to the island’s real estate sector. According to the report, the troika proposes a host of actions that the Cyprus government needs to take to resolve the Title Deeds-cum-fraud mess, including:

  • All outstanding Title Deeds to be issued by the fourth quarter of 2013; changes to the current legislation will be necessary to accelerate the process.
  • The implementation of a consolidated computerised system for the access, management and dissemination of deed records, mortgages, and real estate transactions by the third quarter of 2013.
  • A monthly update on the Town Planning Amnesty plus further incentives to reduce the number of residential permits pending.
  • Changes to the legal framework that would enable banks to dispose of properties that have been used as collateral and whose loans have not been serviced for a period of 18 months.

The troika also wants to see the full implementation of Directive 2008/52/EC on certain aspects of mediation in civil and commercial matters.

In the section on banking, the memorandum concludes that one of the main problems affecting the banks is their excessive exposure to the property market. It also maintains that the calculation of nonperforming loans should include those that are fully secure.

Housing loans collateral shortfall

Pavlos Loizou MRICS VRS
-
13

HOW big is the shortfall between housing loans and their collateral?

The short answer is that no one can be certain. We have chosen to use data from the Cyprus Central Bank (CCB) to make a calculated guess as to what this could be. The data covers the period 2008 Q1 – 2012 Q2 and is publically available.

Loans granted over the past few years had varying requirements in relation to property values [the maximum allowable Loan-to-Value (LTV) ratio was 80% for primary residence and 70% for a second home] and there was/is some confusion as to what the definition of the Market Value (MV) of a property was/is, e.g. with or without VAT.

We do not know the actual value of the properties that banks used as collateral to grant the various housing loans, but the CCB provides a breakdown of the amount of housing loans outstanding per quarter. Whilst we cannot be certain as to the ratio between property value and loan amount, it would be reasonable to assume that most loans would be at the limit of the allowable ratio, i.e. the loan would be 80% of the value of the property. Thus, if we assume that these loans are 80% of the properties’ values, we can work our way back to calculate the hypothetical MV of the collateral.

Having calculated the value of the collateral, we then need to adjust these property values according to the movement of house prices over the period (the ratio between loan and value may have been 80% at the time of granting the loan, but as property values have decreased, ceteris paribus, this ratio must have increased). In order to be consistent, we have used the CCB’s residential price index to make these adjustments. We then recalculated the ratio between loan amount and property value in order to see how this has changed. As shown in the tables the LTV ratio for loans granted in 2008 is above 90% and almost all other loans are circa 85-90% of property values.

It is now time to “play” with our model. A reduction in house prices by a further 5% from 2012 Q2 prices, increases the LTV ratio, but leaves property values still higher than the total loan amount.

Reducing prices by 10%, leads to a shortfall in the value of the collateral relative to the loans of €69 million (1.0% of all housing loans granted over the period 2008 Q1 to 2012 Q2). Reducing prices by 15% leads to a shortfall of €353 million (4.9% of all housing loans), by 20% to a shortfall of €803 million (11.2% of all housing loans), and by 25% to a shortfall of €1.334 billion (18.6% of all housing loans). Remember that this only relates to housing loans granted from 2008 onwards. Commercial loans, consumer loans, etc. are not part of this assessment.

Before we move on to address the implications of the above, it is important to comment why we have not reduced the balance of the loans during this period. Notwithstanding that most housing loans have an interest only/”teaser rate” at the beginning of the loan term, in the early part of a loan’s term the majority of the payment relates mainly to the interest and not to the loan. Only as time passes and the loan is slowly repaid, does the interest payment result in a decrease in the outstanding loan amount.

As noted, a decrease of more than 5% in property values will begin to result in a number of borrowers going into negative equity. This has significant implications both to them, as they will be paying off a loan that is bigger than the value of their house, and to the bank, as its exposure to potential loses will increase. Furthermore, it reduces the bank’s options if loan default does occur, as the potential income from the asset will not be enough to repay the outstanding loan. Thus, banks will be forced to crystallise their losses on the sale of the collateral, increasing their need for capital, and then to choose whether pursue the borrower or his guarantors for the balance.

In our calculations we have not accounted for a number of other costs that would be related to any sale, and for which there would be a further shortfall from the bank. These would include: rolled up interest, unpaid common charges, immovable property tax, estate agent fee, transaction fee (transfer duty), legal fees, etc. Thus, even if property prices do not fall further (highly unlikely) the shortfall amount will increase simply by accounting for these added costs to the bank. Loan recovery data from the USA put these costs at 30-40% of a property’s value at the time of loan default, i.e. a further decrease in the property’s value by 30-40% in addition to any decrease in house prices.

There are another three unanswered questions. How long will it take for the bank to take possession of the property? If the bank does take possession and tries to sell it, who will buy? And more importantly, who will finance the buyer?

It would appear that we have entered “limbo”, where, as the economy deteriorates, debtors default on their housing loans, increasing banks’ loses, causing banks to require more capital to account for these loses, constraining lending and causing the economy to deteriorate further. This becomes a self-fulfilling and self-fuelling negative feedback loop, which will require a jolt in peoples’ psychology, the economy and the property market in order for all to break out of it.

If you think that this scenario is far-fetched, have a look at Ireland. House prices in Dublin are 56% lower than at 2007 and in secondary cities the drop is between 70-80%. The percentage of mortgages in arrears of 90 days or more is 10.9%. As shown in the attached tables, if a 56% decrease in house prices was to occur in Cyprus, then the shortfall between housing loans and their collateral for the period 2008 Q1 – 2012 Q2 would be circa €2.445 billion. Assuming a rate of default of 10.9%, the expected loses to banks would be €267 million. Sláinte!

Pavlos Loizou MRICS

Lead Consultant, Leaf Research

 

1...474475476...695Page 475 of 695