NPLs weigh­ing down on prop­erty val­ues

But an­a­lysts be­lieve that house prices are kept close to a ‘healthy level’

Financial Mirror (Cyprus) - - PROPERTY - By Kyr­i­a­cos Kil­iaris

A Euro­pean Com­mis­sion re­port sug­gests that the high num­ber of mort­gage-backed non-per­form­ing loans (NPLs) is push­ing prop­erty prices down­wards.

Ac­cord­ing to the EC’s re­port en­ti­tled ‘Hous­ing Mar­ket Devel­op­ments in Cyprus’ the large mass of NPLs is on the one hand af­fect­ing banks’ ca­pac­ity and will­ing­ness to give out hous­ing loans, and on the other is putting pres­sure on house­holds to sell their prop­erty or use it as means of delever­ag­ing in as­set-to-debt swaps.

The lat­ter trend is cre­at­ing an in­crease in the sup­ply of houses and flats in the prop­erty mar­ket.

Ac­cord­ing to the re­port, there is a di­rect con­nec­tion be­tween house prices, the sup­ply and the non-per­form­ing loans. How­ever, real es­tate an­a­lysts con­sider the down­ward pres­sure ex­erted by the moun­tain of NPLs may also have a pos­i­tive ef­fect on the mar­ket.

Ex­perts see other forces afoot, push­ing prices up­wards and per­ceive the ef­fect of the high num­ber of NPLs as a fac­tor which can help keep prices at a healthy level, pre­vent­ing a new bub­ble in the real es­tate sec­tor.

The EC re­port doc­u­ments that in Cyprus a large por­tion of bad loans is backed by real es­tate. As the value of this col­lat­eral has fallen, banks have had to in­crease their pro­vi­sions for losses.

The Cyprus prop­erty mar­ket was hit by the global fi­nan­cial cri­sis and then by the debt cri­sis of its banks and its lenders. House sales de­clined by 60% be­tween 2007 and 2009. Nev­er­the­less, sales to res­i­dents re­mained rel­a­tively sta­ble by 2012.

As credit ex­pan­sion ceased in 2012, house sales de­clined fur­ther. In 2015, house sales amounted to about 20% of their 2007 peak.

The re­port points out a sig­nif­i­cant part of the real es­tate mar­ket is the sale of real es­tate to for­eign­ers, de­spite the fact that there has been a de­cline dur­ing the cri­sis.

The cri­sis af­fected sig­nif­i­cantly the sales of real es­tate to non-res­i­dents, which dou­bled in size be­tween the ac­ces­sion of Cyprus to the EU in 2004 and the peak pe­riod of 2007.

With the global fi­nan­cial cri­sis, sales to for­eign res­i­dents de­creased by more than 80% and 2015 ac­counted for only 10% of 2007 sales. In 2016, sales of real es­tate to for­eign res­i­dents ac­counted for around 25% of to­tal sales.

The com­bi­na­tion of de­clin­ing stock­pil­ing led to a sharp drop in be­tween 2008 and 2015.

sales prices and ex­ces­sive of around 30%

It is ar­gued that the de­cline in real es­tate prices has led to an in­crease in the num­ber of strate­gic de­fault­ers, es­pe­cially those who took out loans with their first home as col­lat­eral.

Ac­knowl­edg­ing that of­fi­cial in­di­ca­tors record a small in­crease of 0.8% in house prices and 1.4% in prices of flats in 2017, the EC sees 2017 as a turn­ing point.

How­ever, it said the re­cov­ery pe­riod is likely to be pro­longed due to the num­ber of homes com­ing on to the mar­ket af­ter an as­set-to-debt swap deal with the banks or a re­pos­ses­sion.

Talk­ing to the Fi­nan­cial Mir­ror, a Cyprus Cen­tral Bank con­trib­u­tor to the re­port, said that as things stand there is an over­sup­ply of prop­er­ties in the mar­ket and in­ject­ing so many prop­er­ties af­ter a debt-to-as­set swap or re­pos­ses­sions could over­pop­u­late the mar­ket caus­ing prices to crash.

There is a dy­namic which is build­ing up that could see an in­crease in de­mand.

“The fact that house­holds are in a bet­ter po­si­tion to save up money as unem­ploy­ment has dropped and house­holds now have more than one source of in­come, al­lows house­holds to feel more se­cure about buy­ing a prop­erty,” said the CCB of­fi­cial, on con­di­tion of anonymity.

“So yes, there is a se­ri­ous in­crease of houses be­ing in­jected into the mar­ket but on the other hand there is a small rise in de­mand,” the of­fi­cial added.

The fact that house­holds are in a bet­ter po­si­tion fi­nan­cially than pre­vi­ous years, is also re­flected in an in­crease of their de­posits.

And the of­fi­cial does not ex­pect the banks to un­load the port­fo­lios of prop­er­ties ac­quired on the mar­ket in one go.

“Banks have shown con­straint in un­load­ing prop­er­ties on the mar­ket, while not sell­ing be­low mar­ket prices.”

The of­fi­cial said while there is con­cern of what will hap­pen with NPLs pack­aged and sold-off to in­vest­ment funds there is no gain in sell­ing them off cheaply.

“How­ever, this is an ex­treme sce­nario. It is not in their in­ter­est to sell off the as­sets at ex­tremely re­duced prices, which is what will hap­pen if they at­tempt to un­load their

port­fo­lio at once”.

The of­fi­cial ar­gued that the fact that the high num­ber of NPLs is hold­ing prices down could turn out to be healthy for the mar­ket.

“Of course, if the num­ber of NPLs was not as high as it is to­day, we would have been talk­ing about an in­crease of 3%. Keep­ing prices closer to more rea­son­able lev­els can help the mar­ket to stay away from the ex­ag­ger­a­tions of the past which cre­ated the bub­ble which burst in our faces in 2013”.

Chair­man of the Cyprus Prop­erty Own­ers As­so­ci­a­tion Ge­orge Mouskides, said that the high lev­els of as­set-backed NPLs are cur­rently pro­vid­ing a ceil­ing on prop­erty prices, rather than pos­ing a threat to the mar­ket.

“We have yet to see any in­di­ca­tion that the high NPLs or even the rein­tro­duc­tion of such prop­er­ties to the mar­ket will drop prices to lev­els lower than what they are to­day,” said Mouskides.

He said the “banks have been very rea­son­able and cau­tious so as not to cause dam­age or a crash in the mar­ket. The real con­cern is the sale of mort­gage-backed loan pack­ages”.

Mouskides added that it re­mains to be seen how bank­ing in­sti­tu­tions or funds like the Apollo Fund will choose to make good on their in­vest­ments.

The Bank of Cyprus pack­age sold to the Apollo Fund is linked to some 9,000 prop­er­ties.

“As the fund is ac­quir­ing such a vast port­fo­lio at less than 20% of mar­ket value of the linked as­sets, it re­mains to be seen how the fund will wish to cash-in on their in­vest­ment”.

BoC has sold a port­fo­lio of 14,000 mort­gage-backed loans worth EUR 2.8 bln at half the price (1.4 bln). The loans pack­age is linked with prop­er­ties worth EUR 5.7 bln, with the vast ma­jor­ity of loans (EUR 2.7 bln) be­ing deemed as non­per­form­ing.

Mouskides said that this may also lead peo­ple to off­load their mort­gaged or other prop­er­ties at lower prices so as to bring in fast cash to pay off the debt.

He said that if he was in the fund man­agers’ shoes he would ask bor­row­ers to pay back half of the value of their loans, as un­load­ing so many prop­er­ties in the mar­ket at once would be a po­ten­tial threat for the sec­tor.

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