Are the big in­vestors com­ing?

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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