Attracting major real estate investors
Lenders are proceeding with disposals of property, as well as with swap deals (debt exchange for properties), having so far accumulated several millions worth in real estate. One of the problems is that lenders cannot hold on to them as their own property for beyond a 3-year period, although I expect that the Central Bank will allow for this period to be extended to 6-9 years to allow the market to absorb the impact without causing additional problems in the real estate sector. This is to the benefit of the lenders and the real estate market. Even though the latest measure for the adoption of Leasing (hirepurchase) will assist in the disposal of properties, however, it remains a problem how the financiers will acquire that 6070% of the properties that they will undertake.
Allow me to submit some thoughts which can especially help soothe the demand from international investors, considering the current deposit rates (in Cyprus it is now around 1.5% and abroad 0.50% to minus 1% a year).
Let’s consider that lenders charge interest on arrears of 713%, so the loss is not expected to be that what they show in their annual accounts, but far lower if these overcharges are removed.
• Collective Sales - Some properties can certainly be offered on their own, such as hotels, commercial projects, residential blocks, etc. But in most cases properties will not be attractive enough to raise the interest of investors, even at any price (eg. small farming plots in purely rural areas, shares, etc.). Therefore, some attractive properties (APs) could be integrated with unattractive properties (UAPs) as a whole sales package. Thus, an office complex with a good yield, could be bundled with an agricultural UAP, even at a rate of 80% (AP) vs 20% (UAP).
• Revenue earners - It is clear from the experience so far that large investments are purchased by foreigners and based on our experience expect a yield of 6 -6.5% (initially) and now closer to 4-5% a year. Therefore, such investment properties, if sold together with UAPs might yield a lower 3-4% which again is an attractive yield based on current circumstances.
• Owners / Tenants - In some cases the “purchase” by the lender of a project with the owner remaining as a tenant is an alternative. This particularly relates to office complexes and hotels where the existing owners show a willingness to pay “rent” even 7-8% a year on the cost. But this subject to the lenders being persuaded that the current owner / tenant can meet its obligations. If it is found that after the lapse of 2-4 years it can, then it is easier to find an investor to replace the lender as owner (especially hotels that show an improvement due to tourism).
• Buildings owned by lenders - If in group sales include certain properties of the lenders themselves, this will not be wrong, in an attempt to offload UAPs. Assuming that on their initial capital, lenders have a performance of at least 10% a year (presently at 7%) and this together with the UAPs is reduced to 4.5-5%, it is reasonable to include properties owned by the lenders as well, since that will yield a doubling in performance.
• Property supermarket - I have reported on this issue in a previous article and this proposal is an extension of that.
• Guaranteed performance - Depending on the pace of real estate sales, lenders may consider the possibility of offering partly guaranteed returns to potential buyers for a period of at least 3-5 years. Therefore, in the disposal of a property with a tenant or not, the lender can offer a certain income even at 3-4%, and in case that higher rental income is found, the lender will benefit from the bigger return. In this case the financier’s risk may grow by subsidising the tenant, does not appear to be a bad idea in principle.
• Lenders’ Losses - The whole idea with these proposals is to provide help to lenders to reduce their losses by attracting cash rather than properties that produce a lower yield. Such aggregated and other sales will help attract foreign investors (even locals).
• Government Buildings – I have provided a similar suggestion to the previous idea to the respective Finance and Interior ministers that renting is more advantageous than the use of owned buildings. The use of rental relieves the owners from the Municipal / property taxes, major repairs and maintenance, while offering the tenant (now owner) flexibility to leave due to new requirements and/or technology.
• Public / Private Companies - The best example of offering the property for cash with the owner remaining as a tenant is the Shacolas Group with its Woolworth properties. The creation of public companies that could offer good management even on behalf of the lender for an initial period of 3-5 years should not be rejected considering the expected yields, providing additional certainty to shareholders and investors.
But what do we know as we are trapped on this island, and sometimes some not so relevant people offer advice that is out of this world.
About 15 years ago, while managing a single large-scale project, the owner offered 5% annual guaranteed return for five years (to be deducted from the instalments even if the deal failed). At the time, the borrowing interest was 9%, while there was an annual increase in the values ??of 5-10%. The whole complex was sold in 12 months.
A good idea which we copied from a British developer in central London.