Are the big investors coming?
About 12 months I wrote in this column that it is not expected to see interest from large foreign investment funds to enter the real estate sector. So far, my predictions in this regard have been vindicated albeit there are some purchases by foreign buyers (non-investment funds) but by investors mainly in the hotel sector and other holiday units with foreign earnings inflows reaching EUR 3.0 billion.
Also there has been increased interest from local companies to invest in some developments, however this has been at a small scale in the region of EUR 2.0-3.0 million. What appears to be happening on the market is that distressed loans from the Cypriot banks are being bought by foreign investment funds, so far reaching EUR 2.0-4.0 billion. These investment funds (those who have showed interest) are large scale and have a history of entering distressed economies such as Spain, Greece, etc. These investors are buying loans at a discount without necessarily seeking immediate repayment, thereby enhancing the cash balance of the banks and then they will then try to sell these distressed loans in the future these either as performing or renegotiated loans or directly as properties. These funds are supported by large capital in excess of EUR 30-50 billion and are well organised both with qualified personnel and in terms of service.
In Greece, for example, one such investor who has showed some in-principle interest in Cyprus has around 160 employees, not only to manage the loans but also to undertake the sales of real estate. Should this development be of concern? Perhaps, to some extent, because these new investors will buy loans at a discount (around 20% depending on when they expect to see their return) or after settlement or renegotiation with borrowers, or even sell them directly as properties.
Certainly, Cypriot banks are now more resilient to settle non-preforming loans, but these newly arrived investors with new approaches and with a high expectation of a return on their investments is another matter. Therefore, there is the possibility of a further “crisis” for borrowers, especially in NPLs. Some banks, such as the Bank of Cyprus and Hellenic (and possibly the Co-operative) will probably try to sell off these loans, thereby shifting their risks to third parties, but perhaps increasing their provisions for losses.
Our office was asked by a mega investment fund with billions of euros under its belt when we expect to see the sale of distressed properties (loans) to third parties. We replied that it all depends on the type of loan / property price, marketability and certainly the existence or not of financing from buyers.
For example, BOC is offering very attractive payment facilities to new creditworthy buyers on very good repayment terms. This is a major advantage, having discussed the issue with the billion-euro fund managers, who are “not particularly bothered” because the yield on their deposits is +/- 1%, while in Cyprus they can charge much more and perhaps 3%-8% on renegotiated loans.
This may be good news for our banks but is a cause for some concern to borrowers (especially those with NPLs). These developments are similar to what we have witnessed in many countries and could perhaps upset a lot of us as we see these new developments unfurl. What remains to be seen is who will show interest in the fields and rural plots for which the biggest lender is the Co-operative. The only solution is to bundle various properties into groups in order to sell attractive properties with unattractive ones, and all at a good price.
There is a growing interest for golf courses, but it is too soon to mention anything of essence. Surely, these are also attractive investments albeit there is a relatively large supply, while the government’s proposal to rescind the licenses of potential golf resort developers is they do not see progress within short time frames, is the worst that can happen in a difficult period as this.
Finally, I would like to say we should not get carried away by the interest on properties on the beach front in Limassol, houses in Protaras etc, as it is too early to reach any conclusion. While Limassol is another market altogether, it is not the same as in other districts or locations, while the housing shortage in Protaras with the main demand coming from Nicosia, is a unique case.