Sale and rental of gov­ern­ment of­fices an op­tion to con­sider

Financial Mirror (Cyprus) - - FRONT PAGE -

This was a com­pletely un­eco­nomic method, that was not in the in­ter­est of the state and I have al­ready writ­ten ex­ten­sively on the mat­ter, cit­ing num­bers etc. that show the con­struc­tion of gov­ern­ment of­fices was not in the in­ter­est of the state. There is a per­cep­tion that the con­struc­tion of of­fices on public land “hal­i­tika” (hence with­out the added cost of buy­ing the land) and then the labyrinthine pro­ce­dures in build-op­er­ate­trans­fer projects (with end­less ob­jec­tions, ap­peals, ar­du­ous ar­chi­tec­tural com­pe­ti­tions, etc.) was the best so­lu­tion. This ap­proach did not take into ac­count the value of land, the non-pay­ment by the owner (state) of in­come tax and var­i­ous prop­erty taxes, which is why this method wrongly seemed that it was ad­van­ta­geous to the state. The rea­son is quite sim­ple: build­ings and the con­struc­tion tech­nol­ogy de­velop rapidly and in the end the state will be left with an out-dated build­ing that will be de­mol­ished af­ter 25-35 years, as op­posed to rent­ing and the state ser­vices mov­ing to new premises at the end of its lease and ac­cord­ing to its needs.

If the state bor­rows with one in­ter­est rate, even at 3-4%, it makes sense to off­load some gov­ern­ment owned of­fices at what­ever amount, which will yield the buyer or in­vestor with a gross re­turn of 4-5%. These build­ings can be sold with the gov­ern­ment re­main­ing as a ten­ant (sale & lease back) for a pe­riod of, say, ten years with a right to re­new for another two terms of 5 years + 5 years.

As­sum­ing that the in­vestor will re­ceive 4.5% in rent, but ex­empt from in­come tax and prop­erty tax, the cost for the state will be be­low 3%, which is the cost of bor­row­ing even un­der present high con­di­tions. It is not un­rea­son­able to as­sume that some gov­ern­ment-owned of­fices could be sold to raise an amount of around EUR 500 mln, thus partly meet­ing the de­mands of the in­ter­na­tional lenders for pri­vati­sa­tion or sale of non-core as­sets. These sales may even in­clude the of­fices of some semigov­ern­men­tal or­gan­i­sa­tions with the same rea­son­ing, ie. to in­crease the to­tal in­come per­haps closer to EUR 1 bln.

It is also safe to as­sume that there is a some­what but grow­ing in­ter­est for such in­vest­ments mainly by for­eign­ers, ei­ther to­wards ac­quir­ing Cyprus cit­i­zen­ship and pass­ports or as a purely in­vest­ment deal due to the low de­posit rates and the liq­uid­ity lev­els be­ing in the range of EUR 10-50 mln. We have al­ready seen such ex­am­ples in the ho­tels sec­tor, as well as some of­fice com­plexes (at least four sold in Nicosia and three in Li­mas­sol). This should not come as a sur­prise since this ap­proach is al­ready ap­plied in another for­mat for BOT projects whereby the in­vestor holds the prop­erty for 20-100 years (as in the case of the mari­nas) and then plans to re­turn the en­tire prop­erty and pro­ject to the state.

So, the cen­tral of­fices for the Land Sur­veys Dept., new of­fice blocks for the elec­tric­ity util­ity EAC, the dis­trict court houses in Lar­naca and Paphos (which have al­ready started to show their age in terms of de­te­ri­o­ra­tion and un­sat­is­fac­tory size) is a thought that should be con­sid­ered. Per­haps it is only in our mind when such ideas are re­jected on the out­set, but a list of as­sets has al­ready been sub­mit­ted to the Troika to show as col­lat­eral for state loans. Hence, we have al­ready en­tered the process of of­fer­ing suit­able prop­er­ties.

Hav­ing in mind that there is no longer any in­ter­est in the no­to­ri­ous “prime fil­lets” of state prop­er­ties, at the very end we might be forced to sell these as­sets at lower prices. There are, how­ever, sev­eral par­al­lel is­sues that need to be clar­i­fied first, if, for ex­am­ple, the plot had been bought through ex­pro­pri­a­tion, in which case there could be an ob­sta­cle in the sale, while al­ter­na­tively the sale could be turned into a lease at an an­nual 1 euro a year, also on long-term ba­sis of, say, 100 years.

It will be very dif­fi­cult for some to “di­gest” this ap­proach and not ig­nore the po­lit­i­cal re­ac­tions, es­pe­cially of the left­ist par­ties. But on the other hand, what choices do we have? Now that de­posit rates in­ter­na­tion­ally are around 1%, a yield of 4-5% with the State as a ten­ant (re­gard­less if it is strug­gling at present to sur­vive eco­nom­i­cally) is an op­por­tu­nity for sev­eral for­eign in­vest­ment funds that may not be avail­able in fu­ture.

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