ANTONIS LOIZOU
Financiers - are they up to it?
The subject of non-performing loans (NPLs) is immensely serious and according to Averof Neophytou (president of the ruling party DISY) it is the biggest problem we have in Cyprus after the political one.
Whatever idea one has to help solve this situation, our first care must be the support of the banks, so that we do not have to face the situation of the Bail-In as in 2013. Since we are involved to an extent with NPLs, I wonder how we can help with the target to reduce this problem. I watch the various efforts that the Bank of Cyprus is undertaking (for the other banks they are at an early stage) regarding the swap deals, the recent creation of a real estate fund with a return of 5%, the creation of its real estate management team (REMU) etc. Notwithstanding that banks exchange their debts with real estate valued at 70% of the market value, when it comes to selling their loans in bulk to foreign investors, the latter are rather apprehensive offering a price more likely around 50% (see last effort with a discounted asking price of EUR 400 mln value with a EUR 300 mln offer).
The Cyprus real estate market is so small that it does not provide any sort of confidence to large foreign investors, be it that the economy is recovering, the deposit interest rates are at a reduced level, tourism is on the up, etc. Also, other than the Bank of Cyprus, there has been some success and the recent appointment of specialised foreign firms, by other banks, is at early days to ascertain their capabilities. So far, these new administrators have their own shortcoming because they use bank employees to handle real estate matters. It is not the best and we see delays in responding and even when there is some interest, they are not in a hurry to respond (e.g. no replies, normal bank working hours, no weekends/late afternoons). In a recent case, a financier took his time to reply to four enquiries regarding apartment sales (in one month) and in another it took our office to make 12 phone calls and 1.5 month delay to chase the employee to respond (always in meetings, sick or on leave).
So, the financiers themselves have their own limitations and capability to blame. They need to get their act together, have special promotional teams set up which will go out there locally and abroad to promote their assets, give finance to worthy buyers for acquisitions, keep nagging the local international audit firms, who are handling foreign investors, reminding the market of any opportunities and participate in exhibitions, real estate/tourism, exhibitions, conferences, locally and abroad.
There are of course certain projects that one cannot dispose of especially those which are presently half built, with the only option left is completion and sell it afterwards. Difficult to persuade the financiers to do it, since they are afraid that throwing good money after bad is not a good option, but then, if they do not sell what can you do? Completing a project with limited demand and having acquired it at a discount price could be one option. Project management could be another alternative to offer and as an example there is a 40-home project incomplete in the Protaras area, with very good sales prospects as individual units. No interest so far but if completed I am certain that it will be sold either as private sales/or for villa to let, AirBnB option, etc. It is a difficult job all round. Now the project is abandoned, and it is rundown and vandalised.
In another case, a hotel apartment project was proposed to be sold for a swap deal at EUR 4 mln including 50,000 sq.m. added land. An obvious very low value, notwithstanding that the owners, a well-organised group, claimed that with an added EUR 2 mln investment the project could have reached EUR 10 mln value (+ the vacant land). The bank refused, and the owner has managed to secure from other sources the added investment. Now (first year of operation after renovation) it is showing a G.O.P. of EUR 2 mln p.a. and rising, making it most successful which based on the G.O.P. it is worth, say EUR 20 mln and this in addition to around 50,000 sq.m. of added land for further development. Had the swap deal gone ahead, the bank stood to lose several millions and now it has the opportunity to receive its debt with the added value and the annual income to boot.
Project management is another alternative, where the banks may set up, through sub-contract, 2-3 project management teams, not only to manage the development to complete and sale, but also to manage existing projects (see abandoned properties/projects that are vandalised, no proper maintenance and care, arrears in rental collection). Private firms could undertake this, which based on their own business plan, take it over subject to a performance guarantee by them.
Yes, we are placing added burdens on the financiers, but if they keep their properties as they are at present, their assets/value will be much reduced. A project which we were called upon to value in 2016, we warned the bank that security should be in place (half-built 60 housing units in Paphos). The idea was turned down and upon revaluation for the year 2017, the project was vandalised, by removing everything from electrical wires, to kitchen counters, aluminium windows, etc.
Our experience with most of these foreign management firms are not positive. Not only are they using existing bank employees with no idea on real estate, but even their management is not necessarily up to it. Big firms as they are, most of their staff do not know the Cyprus Real Estate market and the way to go about it. Regrettably they behave like there is no hurry, whereas our own idea for group sales and investment funds has only recently been taken up by the Bank of Cyprus. The rest are still searching, trying to find their way around. In any case we were so disappointed that I wrote a letter of complaint to one management team, but with no response.
Surely, we cannot offer a likeable solution for everybody and a dialogue is required in order to ascertain the problems that each side is facing, hoping for a better future (the recent warning by the E.U. on NPLs is an urgent addition).