Real es­tate stress tests

Financial Mirror (Cyprus) - - FRONT PAGE -

Real es­tate prices have been plung­ing since the mid­dle of 2008 and with all the clauses of the Troika bailout plan re­gard­ing real es­tate hav­ing been met – with the ex­cep­tion of the is­sue of ti­tle deeds and the in­sol­vency leg­is­la­tion which di­rectly re­lated to the is­sue of the fore­clo­sures – we ask our­selves: is the real es­tate sec­tor un­der­go­ing its own stress test?

What is the big­gest worry of real es­tate and prop­erty buy­ers nowa­days?

THE FU­TURE

The buy­ers’ big­gest con­cern is the un­cer­tainty of the eco­nomic en­vi­ron­ment and the neg­a­tive psy­chol­ogy that is pre­vail­ing due to the fi­nan­cial woes of the past five years.

Another ma­jor stum­bling block is the in­abil­ity to se­cure a loan to pur­chase real es­tate and the high in­ter­est rates gov­ern­ing such loans, which, by the way are among the high­est in the EU.

The ques­tion is whether th­ese prob­lems will be over­come and how long this will take.

Even­tu­ally, loan ac­ces­si­bil­ity as well as in­ter­est rates will im­prove in the near fu­ture as the suc­cess­ful stress tests have helped banks re­gain some of their cred­i­bil­ity, as well as the trust of for­eign in­vestors.

RAT­ING AGEN­CIES

De­spite the re­cent pos­i­tive an­nounce­ments by rat­ing agen­cies (Moody’s, S&P, Fitch) we are still 4-7 notches away from the “in­vest­ment grade” rat­ing we should be aim­ing for. We still have a long way to go. This is why it is ter­ri­bly wor­ry­ing when we wit­ness calls from po­lit­i­cal par­ties to the Fi­nance min­is­ter to re­lax aus­ter­ity mea­sures. It is for a rea­son that I worry. We don’t seem to have learned from the mis­takes of the past which brought us to the brink of bank­ruptcy.

The re­cap­i­tal­i­sa­tion of both the Bank of Cyprus as well as Hel­lenic Bank has been a huge suc­cess. Sim­i­larly, the re­turn of Cyprus to the in­ter­na­tional cap­i­tal mar­kets pays lip ser­vice to our view that the sta­bil­i­sa­tion of our fi­nan­cial sec­tor is un­der­way.

NON-PER­FORM­ING LOANS

The stress test suc­cess pro­vides us with the con­fi­dence that the non-per­form­ing loans (NPLs) is­sue will slowly be re­solved as well, as it is one of the big­gest trou­bles banks are faced with.

It also re­in­forces our view that ru­mours that there will be mass fore­clo­sures will never ma­te­ri­alise as banks will have the time to reach set­tle­ment/re­struc­tur­ing on a case-by-case ba­sis after hav­ing cash in­jected into their cof­fers.

The hys­te­ria sur­round­ing mass fore­clo­sures is also ex­ag­ger­ated as this too is an out­come that would prove to be detri­men­tal to banks as this will drive real es­tate prices down and will end in banks need­ing a fresh in­jec­tion of cap­i­tal which might be more dif­fi­cult to se­cure next time around.

IN­TER­EST RATES

Con­se­quently, all of the above lead us to ex­pect that in­ter­est rates will grad­u­ally start drop­ping and ac­cess to loans will be­come eas­ier.

Re­gard­ing the aur of neg­a­tive psy­chol­ogy, it has been proven through­out the years that this can change very quickly, both pos­i­tive and neg­a­tive.

Steps like the re­al­i­sa­tion of the plans for the casino, the pri­vati­sa­tion of semi-gov­ern­men­tal or­gan­i­sa­tions and the view of a po­ten­tial ex­ploita­tion of nat­u­ral gas de­posits can turn things around big time. Based on our coun­try’s pos­i­tive out­look, al­beit start­ing from a low point and cur­rent low prop­erty prices, we are al­ready see­ing a lot of in­ter­est from for­eign buy­ers.

The banks’ stress tests suc­cess will start to fuel trans­ac­tions in the real es­tate sec­tor as well. I ex­pect a fur­ther in­crease in the num­ber of prop­erty trans­ac­tions in 2015 and a sta­bil­i­sa­tion of prices. The prop­erty sec­tor is grad­u­ally pass­ing through its own stress tests as well.

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