Central Bank says property prospects are bleak

Nigel Howarth
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16

ACCORDING to figures released on Thursday by the Cyprus Central Bank, property prices have dropped for a ninth consecutive quarter and have now returned to their 2007 levels.

But despite the downward trend, residential properties are still 32% more expensive than they were in 2006.

The downward pressure on prices is due to a combination of oversupply and liquidity problems and is most evident in the holiday home market as shown by the price falls in Paphos, Larnaca and Famagusta.

According to Central Bank data, residential property prices (houses and apartments) fell by by an average of 1% during the first quarter of 2012.

With the exception of Paphos and Famagusta, where prices fell by 3.1% and 2.4% respectively, price falls during the first quarter were slightly less than those experienced in the previous quarter.

However, there has been a slight slowdown in the rate at which prices are falling. This is partly attributable to the implementation of the new legislative measures introduced towards the end of last year that were aimed at stimulating the housing market.

On an annual basis, residential property prices have fallen by 4.9%. Apartment prices have dropped 4.3% and house prices have fallen by 5.4%.

The highest annual decrease has been in Paphos, where prices have fallen by 10.6%, while the lowest price falls have been in Nicosia, where they are down 3.2%.

According to Central Bank, the prospects for quick recovery in the housing market are not promising. This is due to the lack of liquidity in the market coupled with the measures being discussed between Cyprus and the troika to consolidate the island’s ailing economy.

Cyprus Property Action Group and the EU

Nigel Howarth
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12

FOR more than two years, the Cyprus Property Action Group (CPAG) has been enlisting the support of MEPs and is making significant progress in gaining the assistance of the European Union to investigate the many potential problems faced by those buying property on the island.

Some of the key points from CPAG’s comprehensive update on progress are summarised below. For a full report see UPDATE: July 2012 – EU Commission  – European Court of Human Rights.

EU Commission

Late last year, following a petition by CPAG and 41 MEPs, EU Commission Vice President Viviane Reding confirmed that “…an administrative letter has been sent to the Cypriot authorities enquiring on the one hand, as to the actions carried out at national level to address the reported practices and… On the other hand, about the measures taken to ensure that consumers are adequately informed about the Cypriot law transposing Directive 2005/29/EC on Unfair Commercial Practices (the ‘UCPD’).”

Following a response to that administrative letter, the Commission has instigated a pre-infringement procedure and the EU is presently considering whether to take Cyprus to the European Court of Justice for its failure to comply with EU law.

At the Commission’s request, CPAG has been working with the EC’s Berlin-based consultants tasked with reviewing the implementation of the UCPD. Annex 1 of the Directive contains a ‘black list’ of 31 “Commercial Practices which are in all Circumstances Considered Unfair”.

With the support of MEPs, a recommendation has been made that the act of withholding legal title to property is added to the UCPD’s ‘black list’ when the UCPD is next reviewed.

European Court of Human Rights

CPAG has also been assisting a number of buyers whose complaints to the Cyprus Consumer Protection Service (CCPS) had been rejected. (The CCPS is the responsible agency for enforcing the UCPD). These buyers have now turned to Europe for assistance and their cases have been accepted by the European Court of Human Rights (ECHR) and will be heard in the coming months.

In closing, CPAG thanks those who continue to support their efforts especially those MEPs who have signed up to their cause.

Further reading

UPDATE: July 2012 – EU Commission  – European Court of Human Rights

Overseas property sales hopes helped by Chinese

Bejay Browne
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16

CHINESE buyers are helping to rejuvenate the stagnant property market in Paphos where sales have risen by 25 per cent in recent months, industry professionals say.

The once booming Paphos property market, once dominated by British buyers, collapsed in 2009 as a result of both the worldwide recession and the title deeds scandal in which buyers who had paid in full for their properties were left years later without possession of ownership documents.

The collapse has had a serious knock on effect on the local economy which had long relied on tourism and property sales as an economic mainstay.

“There has been a 25 per cent increase in Paphos sales according to recent official statistics and part of this increase is due to the Chinese purchasers,” said George Leptos of the Paphos-based developers the Leptos Group and head of the Paphos Chamber of Commerce (EVE).

Billboards along the main roads of Paphos are now advertising properties for sale in Chinese while developers have been actively targeting the Chinese market for some time.

Their perseverance appears to have paid off.

“We have various offices in China and we regularly attend various property exhibitions. All of our sales in recent months have been to Chinese clients,” said Sophia Charalambous of Korantina Homes.

She said Chinese clients are keeping the company busy, and are choosing to purchase top end luxury properties.

“We have many Chinese clients, mostly business people and families. Most of our clients have a budget of around €1,000,000,” she said.

“The British market has almost dried up for us. We have the occasional Russian client but we are mainly working with the Chinese. Next week 12 prospective buyers are arriving and we will see how many make purchases.”

The property professional added that even though China was a ‘new’ market, it wasn’t a ‘phenomenon’ as such, as investors from China should be expected in Cyprus.

“China has a large population and has a rich economy. It’s doing better than a lot of other countries,” she said.

House sales in Paphos are just one example of the stronger economic links between Cyprus and China. The Chinese company, Far Eastern Phoenix, is eager to lease the old Larnaca airport from the government to turn it into an exhibition space. On Friday Communication and Works Minister Efthymios Flourentzou said an oral agreement had been reached over terms, but a written agreement was still needed. China was also one of the countries approached to provide a loan to the government before it was forced to go the EU for a bailout in June.

Charalambous said that most of the developers in Paphos are dealing with the Chinese market and that the definite upward trend in Paphos property sales was due to the Chinese.

George Leptos was equally optimistic.

“Generally there are good prospects regarding this market and it should be explored further,” he said.

The Leptos Group has participated in exhibitions, generated Chinese business contacts and undertaken product promotion in China.

Leptos said that the company’s Chinese clients are interested in ready or almost ready properties, of a value ranging from €300,000 to €800,000.

As non-European nationals, prospective Chinese buyers need to make a minimum property purchase of €300,000, and prove they are of an adequate financial status to stay in Cyprus.

“The Chinese as well all other non-European property buyers are entitled to apply for and receive a permanent residency permit for themselves and their family, providing that they fulfil certain pre-specified standard conditions,” said Leptos.

“Once the permit is obtained, they can reside in Cyprus for as long as they own the property. They become what I would call ‘permanent tourists’.”

While Chinese buyers are apparently boosting sales in a depressed market, Pavlos Loizou, board member of RICS Cyprus (the Royal Institution of Chartered Surveyors) said that the latest figures were far less impressive when put into context.

“Whilst it is correct to say that there has been an increase in property sales in Paphos since 2010, very few transactions actually occur every month and so when these figures are turned into percentages terms the increase appears greater than it actually is.”

While Loizou said he couldn’t specify if Chinese buyers were purchasing properties in Paphos, he noted that in March only 90 properties were sold in Paphos, 36 of them to foreign buyers. In April the figure dropped to 84, 36 of them to foreign purchasers. In May, sales reached 165, 82 of them to non Cypriots.

“Paphos was the first town to experience a fall in sales as well as the largest decrease in sales, but it is beginning to stabilise, whilst other towns are still falling. You could say that Paphos hit the bottom first.”

Paphos has been most affected by the property slump in Cyprus because it had a far greater reliance on foreign purchasers and now has the highest number of completed units which remain unsold.

The Title Deed fiascoBut the decline in sales was also due to the title deeds fiasco. Commonly in Cyprus, developers take out mortgages on land or property, the liability for which may then be placed on the purchaser of a property on that development, if the developer or landowner becomes bankrupt. It also meant title deeds were held by the bank who granted the mortgage.

After years of outcry by misled owners, in 2011 the government introduced a ‘specific performance law‘ which grants a contract of sale precedence over any pre-existing mortgage (providing that the buyer pays the mortgage lender the amount of the mortgaged debt attributable to the property they are purchasing).

Purchase a property with a Title Deed

Even so, buyers should still purchase a property with a title deed (and use the services of a competent & independent lawyer to check everything is OK and to draw up a watertight contract – and ensure the title is ‘clean’; i.e. free of any mortgages and other claims) to ensure a buyer is protected from the numerous pitfalls; this will also enable the resale of the property without encountering any problems over ownership.

However, according to Korantina Homes, their Chinese clients are purchasing a mixture of properties, some off plan, some with title deeds and some where the deeds are “almost ready”.

Property sales in Cyprus boosted by Chinese

Nightmare scenarios for sweeping cuts

Nigel Howarth
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8


THE CYPRUS Broadcasting Corporation reported that “nightmare scenarios for sweeping cuts across the board begin to seem more likely with every passing day” in a news item about the recent troika visit that concluded on Friday.

Reports suggest that the troika delegation is pushing for an immediate annual cut in public and semi-governmental salaries of 7.5 percent with a further 15 percent annual cut in salaries over the next two years.

The troika will also be proposing the abolition of the Cost of Living Allowance (CoLA) – and a dramatic reduction in retirement lump sum payments also appears inevitable over the next two or three years.

According to information obtained by the CyBC, the delegation is also proposing the permanent revocation of thirteenth salaries along with increases to pension contributions beyond the current level of 3 percent.

The cuts will seek to reduce the cost of the civil service to the taxpayer by around 50 percent with changes to how pensions are calculated also appearing to be part of a large wave of cuts.

Following a meeting between members of the troika and Theodoros Parperis, the president of the Institute of Certified Public Accountants of Cyprus (ICPAC), we understand that no changes are being proposed to increase the level of corporate tax.

Troika delegates have left the island and are expected to return in September when a memorandum is likely to be signed with the government. In the meantime consultations between the delegation and the government will continue during the coming weeks.

The ballooning Cyprus fiasco

Wolf Richter
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10

THE government of Cyprus is desperate. It is deliberately slowing down paying its contractors.

“We are talking about final payments and settling of bills for work that was carried out and passed through the inspections, and for which an order was issued for payment,” said Nicos Kelepeshis, head of the Federation of Associations of Building Contractors. 120 days, and more. The government also told inspectors to delay inspections in order to slow down payments.

In June, Cyprus had held its nose and requested aid from the Troika, those despised austerity thugs made up of the European Union, the European Central Bank, and International Monetary Fund that have, in Cypriot eyes, wreaked havoc in neighbouring Greece. And this week, once again, these despised Troika inspectors are swarming over Cyprus to find out how much money the banks would need to deal with their putrefying balance sheets, and how much the government would need to stay afloat.

If a deal is reached – sticking point are the conditions, namely structural reforms, budget cuts, privatizations, and tax increases – the first bailout money might arrive in October. But Cyprus is bankrupt now! So, the government is raiding the “semi-state” sector. Last week, it pilfered €101 million from the Cyprus Telecommunications Agency, €50 million from the Ports Authority, and €24 million from the Human Resource Development Authority. Now it’s going after the pension fund of the Electricity Authority to get a couple hundred million. This place is seriously out of money.

At first, it was just a funding crisis. After markets closed the door, Cyprus went begging to Russia and got €2.5 billion late last year. That money has now evaporated.

Then it was the banks. In June, the Bank of Cyprus needed €500 million and Popular Bank €1.8 billion – in total €2.3 billion. A black hole in their regulatory capital had developed when they were forced to write down the defaulted Greek government bonds on their balance sheets [“We owed it to our children and grandchildren to rid them of the burden of this debt,” sneered Greek Finance Minister Evangelos Venizelos at the time as private sector investors got whacked with a 74% loss. Read…. “A harder Default to Come“].

But the banks were joking about the €2.3 billion. They’ve also been eviscerated by Greek corporate debt – 40% of the loans on their balance sheets. They’re turning to trash as Greece slithers deeper into its fifth year of recession. Then there are the loans left over from the real estate bubble and title-deed scandal that the banks themselves colluded in. An estimated 130,000 properties are without title deeds – in a country with only 838,000 souls. Those who think they own these properties don’t legally own them. A nightmare gumming up the future of the country [I warned about it in October…. Another Eurozone Country Bites the Dust].

And so in June, as bailout talks with the Troika took off, the €2.3 billion were declared a joke. “Eurozone sources” mumbled something about €10 billion, including a government bailout, which hadn’t needed one before.

Cyprus has been trying to triangulate its bailout negotiations by adding China and Russia. They’re ogling the vast natural gas reserves found off the coast. Awash in natural gas, Russia is the major supplier to the EU through a system of pipelines, and it wants to keep control over its export market. China wants to grab resources around the world. And on July 6, Russian Finance Minister Anton Siluanov confirmed, “Yes, we have a request from Cyprus. They’re looking for €5 billion.”

So since Monday, the despised Troika inspectors have been plying their trade. And it didn’t take long for it to seep out that the banks alone would now need a bailout of €9 billion – a stunning amount for the banks in such a tiny country. Plus, the government would need €4 billion. For total package of €13 billion.

But the €9 billion for the banks is likely to grow even further – because bad debt isn’t bad debt in Cyprus. Under Cypriot rules, loans on the banks’ books that are over 90 days past due aren’t considered bad debt, and no losses have to be recognized, if the loans are secured. Hence, a mortgage that is in default doesn’t have to be written down because the bank might eventually obtain the property, which takes many years, and then sell it to recuperate its money. But property values have collapsed. And worse: the title-deed fiasco resulted in banks securing two or more mortgages with the same property – and only one of them has any value at all. But they’re all “secured”; hence, none have been written down.

The Troika inspectors are circling. They want those loans written down. Government and banks resist. The outcome of this clash will be a big factor in determining the bailout amount for the banks. And the government bailout of €4 billion will certainly rise. The first time is only the beginning – Greece, if it were to stay in the Eurozone, would require a third bailout. Standard and Poor’s tacked on some extra billions and came up with €15 billion. 83% of GDP. €18,000 ($22,000) per resident. Another bottomless pit. Is that why Russia and China haven’t jumped into the fray?

In the run-up to this crisis, people have gotten rich and taken their money to Switzerland. What’s left is debt. But instead of letting it blow up and disappear, wiping out creditors and equity holders in the process, it’s being replaced with new money, but from taxpayers elsewhere: 29% from Germany, 22% from France, even from teetering Italy and Spain….

But Spain is on the brink. The word is out: default. Or bailout. Read…. The Extortion Racket Shifts to Spain.

And here is a great perspective by George Dorgan, a portfolio manager in Switzerland who used to live in Italy. Read…. Italian Euro Exit: why it might come in 2-3 years and why it will help the Eurozone and Italy.

By Wolf Richter at The Testosteronepit – where the truth comes home to roost.

With our pants down

Pavlos Loizou MRICS VRS
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11

THIS article provides an outline of three topics: societal turbulence, the state of the Cyprus economy, and opportunities in the property market.

It is important to examine these topics in tandem, as one cannot scrutinize the property market without taking into consideration the state and outlook of the economy, which in turn is being affected by (and forms part of) the workings of society.

Economy

A crisis is when you cannot say “let’s just forget about the whole thing.” Whilst previous “mini crises” have been swept under the carpet, this one is not going away. The main reason is that banks (and coops) form such an integral part of the workings of the economy and of society, that there is an interlinked loop between the three. Thus, whilst other crises could be “isolated” and forgotten about, this one lingers on and on.

The problem isn’t just a deepening recession, however serious. We face a conjunction of three large events – the implosion of the debt-based finance-capitalism that developed over the past twenty years or so, a fracturing of the euro resulting from fatal flaws in its design, and the ongoing shift of economic power from the west to the fast-developing countries of the east and south. Interacting with each other, these crises have created a global crisis.

How do we solve the problem? There is no silver bullet. We need to start by accepting that the problem is here and that any problem cannot be solved by using the same level of thinking that created it. In other words, if you screwed it up, you can’t fix it. Is it logical to expect that the same politicians, bankers, consultants and bodies will solve the problems which they themselves helped create?

The solution to the problem is likely to unfold at the end of a “black swan” type event, i.e. a rare event that will in turn lead to catharsis, like a war or a revolution. Until this “rare event” occurs, we will continue to move from one failed solution to the next, and thus from one crisis to the next, as the system struggles to survive whilst imploding at the same time.

We apologise if we sound too philosophical about this, but we call it how we see it.

Cypriot society

A classic example of the system’s struggle for survival, is the recent announcement/letter of the Association of Cyprus Banks that they are “concerned” that the definition of non performing loans that the Troika may use in calculating the recapitalisation its members require, will lead to big(ger) losses for local banks.

The letter goes on to state that the Association should be invited to (I paraphrase) “explain to the Troika the nuances of the Cyprus banking system”. What does that mean? Well, that the same banks that are likely to require circa €8.0bn to €10.0bn to be recapitalised, want to send the same decision makers who caused the need for the recapitalisation to explain to those who will give them the money how to do their job. Nice.

In his introduction to first year students taking his finance module, Professor Robert Shiller, one of the leading researchers in real estate finance, gives a simple explanation of how finance works: “a bank lends you money and charges you interest for giving it to you. If you don’t pay the money back, it takes the collateral and sells it in order to get its money back. If it can’t get its money back then the system doesn’t work and the bank will run out of money.”

The Association of Cyprus Banks is worried about Troika’s definition of “non performing loans”. The definition used by the Cyprus Central Bank is that if a loan is not being serviced for more than 90 days, i.e. if interest is not being paid on the loan, and the collateral is valued at less than the loan, then the loan is deemed to be “non performing”. However, the international definition is that if a loan is not being serviced for more than 90 days, then the loan is deemed to be “non performing”. The argument of the Association is that a loan’s collateral can be sold and thus the money paid back to the bank (as per Professor Shiller’s definition).

However, in order for that to happen (1) property rights must be absolute, (2) the foreclosure process must be efficient, (3) the sale of the asset must be forthcoming. With 130,000 properties not having title deeds, a foreclose process lasting at least 6-10 years, and the entire banking system having no liquidity, how likely is that any collateral will be sold? Yeap, that’s the problem right there. The system made a rule that “obstructed” the true nature of non performing loans and now wants to maintain the definition in order to safeguard its survival. For the past three decades nobody spoke about this, because banks were (and are) the “sacred cow” of the economy. As the saying goes, “a good slogan can stop analysis for fifty years.”

Cypriot property market

This leads us to the third topic, of opportunities in the property market. It is important to note that the property market is not dead. There are circa 1,000 transactions concluding every month, with the property markets of Paphos and Famagusta beginning to show some early signs of recovery (albeit from a very low base).

Buyers are of course concerned about the state of the economy and of banks, but with prices at 30-50% off their 2008 peak and the sterling up against the euro by 20-30% since 2009, Cyprus property is becoming an attractive option especially for overseas buyers. The top end of the market is also performing quite well, with sales of “exclusive” houses and apartments continuing above trend.

We do not expect a rebound in transaction activity or prices, but a slow pick-up in activity and progressive stabilisation of prices in Paphos and Famagusta (we remain negative for the other districts; particularly Nicosia’s, whose labour force is dominated by bank and public sector workers). With more locals choosing to study in Cyprus and rent housing for longer, opportunities will arise in student housing and serviced/ managed apartments. We also note the rise of smaller companies setting up a physical presence in Cyprus, requiring serviced offices and good quality residential units for their staff.

The “game” now is less about volume and more about quality of product and service.

We look forward to the forthcoming changes in the workings of the banking industry and to the Cypriot economy as a whole. We remain concerned that society is not ready for the difficult path ahead, and that leadership will not be up to the required standard. The only thing to be certain about is that turbulence brings with it change and that with change come opportunities.

Pavlos Loizou MRICS

Lead Consultant, Leaf Research

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