Real estate stress tests
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 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.
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.
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.
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.