It time for real estate funds?

There are grounds to believe that the time is ripe, at least for an initial examination, for the creation of real estate funds in Cyprus. My opinion is based on the following: - Prices have reached rock bottom for good properties and I do not expect any notable discount/reduction over the immediate future.

- The lenders offer real estate either in the form of swap deals or auctions at reasonable prices, which are coupled, in most occasions, with financing (to worthy buyers).

- There is ample supply of all sorts of real estate in districts.

- Existing buyers and re-sales to new buyers could be coupled with long term finance (subject to prior agreement with the lenders).

- Most property sales are done based on a “clean” owning company, reducing/doing without transfer fees with the company ready for operation.

- Interest on deposits have been reduced from the past, from the level of 6% to the present 1.5% p.a., whereas deposit rates abroad are around 0.5% with some foreign banks even charging a “depositor’s” fee for this purpose.

- The real estate prices based on recent developments and projections appear to be on the increase (at least for selective properties).

- There is a prevailing worry about European banks (e.g. Greece, Italy, etc) as well as others on their stability.

- The popular investment regions by locals, such as Greece, is not all the best, bearing in mind the uncertain economic future of this country, whereas popular London has its own problems with the unknown consequences of the Brexit.

With all the above in mind and with the, albeit, limited finance available in the Cypriot real estate market, is it perhaps the time to examine the possibility of setting up local real estate funds?

I suggest that such funds could vary in size and purpose, but as a basis suggest that: - Initial fund EUR 10.0 mln. - Target to borrow EUR 5.0 mln. - Period of exit of the fund 8-10 years - Target for an annual return 4% p.a. (minimum) For your consideration, I can suggest the following market target as a start:

- Aim at the seaside areas of the Famagusta region (e.g. Ayia Napa-Paralimni-Sotira-Dherynia) towards development of land.

- Target buildings for income let to solid tenants on mid-

all term lets (at least 4-6 years) which show a return of 4%-5% gross.

- Aim for residential apartments in chosen localities and which need renovation/improvement and with good chances to resell.

Perhaps these funds could be created initially with the financier being the major shareholder, with an option (or otherwise) to exit in 2-4 years. Since management will be in the hands of the lender, the other shareholders will feel safe, as opposed to a private company/individual to control the fund. The more attractive the fund appears to the market, the greater the demand for it and it is one way out for the financiers to dispose of their properties, which they hold.

If the financier/majority shareholder “guarantees” an annual income for the initial period of 2-3 years of 1.5-2.5% p.a., it will become even more attractive securing an initial return plus the expected capital appreciation and the anticipated profit at the end for the shareholders.

The financiers could set up numerous such funds of various levels of equity investments. Larger funds could be set up aiming other higher amount investments, such as hotels, golf courses, beach land, students hall, beach villas, villas to let, etc.

Notwithstanding the situation of the Cypriot economy, the real estate market is improving with clear signs for a positive future.

Instead of the prevailing situation of lenders sitting back and waiting for investors to show interest, the above vehicle is one option which might attract the big investment buyers from abroad (such as Chinese interest for shopping malls, hotel development, etc).

If this idea gets a proper study and is so promoted, I feel that it is an effort worth exploring, especially by the lenders.

Regarding alternative investment funds, although it sounds odd, agricultural fund investment should not be discounted outright (see my previous article on investing in agriculture). The problem with this fund is the very small plots of agricultural land.

However, with the halloumi and other local products to be produced as a patented product (kolokasi, grapes, prickly pears, aloe and its products, etc) are possibilities worth to be investigated.

If lenders get together and exchange ideas on how to promote these agricultural plots as one lot in one area, it could be possible to come up with large holdings. So, if one financier owns an X plot and another an adjacent or nearby plot, provided they get together, it could be a solution.

Agricultural investment will need a special study on soil suitability and produce quality. To this end the Ministry of Agriculture could help with expert knowledge, whereas the various subsidies are an added plus. Mind you, agricultural investments will need a lot of persuasion that are not easily understood by the wider market and it will be a difficult job. But then what is one going to do with the various agricultural plots now in the lenders’ hands lying unutilized?

Food for thought?