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Banks not pressuring developers to service their loans

The fall in residential property prices that we reported on Thursday could have been even worse if the banks had pressed developers to service their loans by reducing new property prices still further to encourage sales.

ON THURSDAY we reported that residential property prices had fallen for six consecutive quarters according to the Central Bank of Cyprus’ latest Residential Property Price Indices.

However, speaking to the Sunday Mail, economist and ex-banker Symeon Matsis said that the fall in property prices would have been worse if the banks pressed developers to service their loans by reducing property prices still further to encourage sales.

According to Mr Matsis developers’ arrears are on the increase and the banks are bracing themselves for a further haircut on their Greek bond holdings.

(Eurozone finance ministers agreed that banks should accept bigger losses on their Greek bonds but have not said how large these losses should be. In July, banks tentatively agreed to take a haircut of around 21%. But analysts are now saying that they may have to accept losses of between 50% and 60%).

In his interview with the Sunday Mail, Mr Matsis said that “The banks are not putting pressure on construction companies as they fear this would have further side effects. If the companies were pressed into selling their assets, this would cause a drop in the value of collaterals”.

Mr Matsis statement confirms widely held suspicions that property developers are receiving insufficient income from property sales to service their loans – and that the banks are not pursuing them for payment.

Clearly this situation cannot go on indefinitely and some property developers must be close to bankruptcy. The banking sector too must be very worried about the situation; but what can it do?

Readers' comments

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  • Odd_Job_Bob says:

    Robert, I really hope you are correct.

    However (I know, I know, I like my howevers)…
    My personal experience is that the Seriously Rich Russians (SRRs), who MAY have acquired their enormous fortunes back home in ways which possibly didn’t completely comply with the Queensbury’s, when they get to the EU, they truly believe that the rule of law and fair commercial practice applies.

    I’ve been in property developer sales meetings specifically aimed at Russian investors where, when the question of title deeds came up, many a construction industry professional and lawyer were queuing up to rubbish any suggestions of impropriety in property purchase in Cyprus.

    I’ve found in general that the Russians coming here can be split into two groups: the €1m+ and the below. The below have been promised a Cyprus Pass if they purchase property here for at least €300k (which obviously never materialises). These guys are mostly in the same boat as us: they came here to live or have holiday homes and, when they want to sell or their developer goes bankrupt, they will be stung in the same way (and already are).

    The SRRs are a different kettle of fish. They are certainly not fools, but I think they view the world, and have ways of remedying any perceived sleight, slightly differently to the rest of us. They have been promised that if they have assets here of, I think the figure being bandied around is €22m (owned through trusts, apparently), then they can be fast-tracked citizenship, and thus gain the possibility of moving anywhere in the EU. These guys are, for want of a term that won’t get me into trouble, asset-dispersers. They don’t really have any intention of living in Cyprus and, at some stage in the future, will encash their portfolios here and go and spend their newly-laundered money somewhere nicer.

    If they cannot sell their portfolios, which is likely to happen if the developer that has sold it to them goes bankrupt and the bank tries to repossess, they will start to employ some of the tactics from home that enabled them to acquire their fabulous wealth in the first place. Unfortunately, the Cypriot mentality seems to be: Get the money in now, worry about the consequences later. This is the most worrying of all as the so-called Cyprus mafia and lawyer/ developer/ government minister etc cartels really don’t understand what real mafias do and to what ends these guys will go. Dissolving your development company, spiriting the dosh offshore and laying low in Bulgaria will be NO protection.

    In a line taken from the film “The Sixth Sense”: I see dead people…

  • Robert Briggs says:

    @Dimitri, the Russians who are buying at the top end of the market, are not fools and will not touch anything without full, genuine & immediate Title Deeds.

  • out of the frying pan into the fire says:

    I love some of the comments posted here. They make good fun to read. However in the UK the government had to introduce a 3 line whip to stop a referendum on remaining in the EU. My view is if the EU cant stop us from being robbed Cyprus then why are we in the EU. My Euro MPs do their best to fob me off so why don’t I vote UKIP and get out? I suggest that others get onto their Euro MPs. If they are going to lose their gravy train, they would I suggest do some thing to force Cyprus to put matters right. Who knows it might even be retrospective if enough pressure is put on.

  • dimitri says:

    @Steve, a reliable contact has told me that Russians are buying and at 1 million prices and over….hmmm but that won’t save the day….I am still wondering what the banks will do when the eventually have to re-posses developers assets, and especially if these assets are plagued with problems have no chance of a clean deed and hence priced much lower, what will the bank do with these assets?how much of a loss will they take on?

  • Richard says:

    Mafias can be defeated

    The right people have got to want it to happen though – and be suitably motivated by the outcomes to crush them.

    I’m now 100% convinced this needs to come from outside Cyprus.

  • Steve says:

    When I lived in the UK it was common practice for builders to take out mortgages on land to finance building developments. It’s an acceptable building practice, but it needs proper banking oversight and a conveyancing system that requires the buyer to be fully informed about what they are buying. The system has fallen down in Cyprus because the Cyprus mafia – the politicians, the banks and the legal profession have colluded to allow developers, who are major contributors to the Cyprus economy, to get away with financial murder. The disturbing aspect now is that, having been discovered and their disgraceful activities publicised, the Mafia have done nothing to remedy the situation, past or future. All it requires is a gullible public to keep buying Cyprus property.

    By the way, the falls in property values don’t look so big to me when I compare with prices in the property sales booklets of 2007 to mid-2008. After the financial storm in late 2008, house prices in Cyprus continued to rise as if there were no problems looming. These inflated and totally unrealistic prices are still the basis for the big reductions being advertised three years later. Property in Cyprus is massively overpriced, but look at the figures- some people are still buying.

  • Richard says:

    Odd Job’s precise and honest summary (and plan) must be something that is parcelled up and put in front of the EU when Cyprus take over the ‘presidency’.

    The fact that a solution exists is something that somehow must be forced down the Cypriot Government’s gullet – whether they like it or not. Whether they are ‘net contributors’ or not. Germany is a net contributor too – and being duped into bailing out Greece (I wonder what the Mullers and Reinhardts are making of that right now).

    We’re all well aware that the EU is unstable at present – and yes, they do have much bigger problems than this – but it’s a ‘poster child’ problem of sufficient magnitude that it can be used to highlight just how screwed up the whole ‘Euro’ circus is. It also needs putting on David Cameron’s desk too. Perhaps Merkel and Cameron make bailing out Greece conditional on Greece forcing Cypriot banks to lean on the developers and their ‘professional’ advisors.

    It’s time our Government started doing their job of protecting UK citizen’s rights. We’ve made significant investment in Cyprus for well in excess of half a century – long before we bankrolled their stinkingly corrupt property industry.

    One thing is clear – the big lesson for us is overseas investment is considerably more risky than it appears on the surface – for which in a bizarre way – I’m grateful for the lesson at this rather pivotal moment in my life and where it’s going.

    I don’t think I want the market to suddenly get ‘stimulated’ again – and just offload the rubbish onto someone else. That’s a snot and sticking plaster approach. I want the Cypriots to feel the deep pain of long and lasting cultural change – or be forced to give investor’s back their money (that’ll hurt them).

    Maybe there is something in the lessons of the Middle East in the last 18 months that should be making these people come out of their complacency and take at look at the emerging landscape of the 21st Century.

    Just haven’t found the right pressure point yet – but we will…

  • Costas Afortune says:

    Surely this can’t be correct ? According to Alpha Bank in Paphos, there is no NO fall in valuation of the properties they are funding at Alpha Panareti St George Hills? Although they (Alpha Panareti) will not let any independent surveyor on site to revalue etc, the bank also say they are happy with there own valuations, and that prices are still the same as they were 5 years ago?

  • Denton Mackrell says:

    @Hani. Any ideas you have for how to solve this systemic problem rooted in sovereign corruption will be gratefully received.

  • Hani Chehaiber says:

    GET IT OVER WITH QUICKLY, THE MARKET HAS TO COME TO NORMAL IF WE LIKE IT OR NOT; SO, THE QUICKER THE BETTER.

    YOU ALSO NEED TO SOLVE THE ISSUE OF TITLE DEEDS, THOSE ARE TWO BIG NEGATIVES FOR THE CYPRUS PROPERTY MARKET AND WAITING FOR GODOT WILL NEVER SOLVE THEM….

  • Denton Mackrell says:

    Odd Job’s summary of what he found confirms (a) a grand conspiracy and (b) it’s sovereign corruption being orchestrated by the state.

    A banker friend (is that an oxymoron?) from Ireland with experience of the Irish property collapse and NAMA reckons Cyprus is v close to what happened in Ireland. The difference is Cyprus has no NAMA – and it has a huge exposure to Greek debts. All it has is the temporary bail out from Russia gambling on an as yet unproven and slow to develop potential offshore gas asset. Or, as my friend put it, the dripfeed syndrome of the living dead. No one in power is even attempting any radical surgery. They live on gambles, luck, divine providence and miracles.

    Sauve qui peut!

  • Odd_Job_Bob says:

    GREAT comment Denis.

    The major difference between NAMA and anything that may (but certainly won’t) happen in Cyprus is the level of government collusion in the developers’ debts. We (a little consortium that I put together last year) approached the developers, banks and government with pretty much the same idea (we worked out that at approx 65% write-down, including taxes due to the government and also including monies owed to builders, architects etc. whom the developers have largely not paid but who would be willing to finish uncompleted properties in the developers’ portfolios, with a contribution by deedless expat purchasers of hopefully a tiny percentage of their property value, to be determined by how much was owed by their developer etc) we could SAVE THE CYPRUS PROPERTY MARKET! I know, a grand ideal but hey, why not shoot big. In the worst case scenario (where it just wasn’t possible to clear the developers reduced debts and thus get title deeds issued), we would at least let the purchaser know how much he was liable for IN TOTAL. Then he could make a decision re: what he wanted to then do.

    What we found was:

    1) the developers REALLY didn’t know how much they owed. Their professional advisers had all the figures and conducted the rescheduling of loans etc

    2) The government had NO INTENTION of the developers having to pay off their loans. If you look at ALL the legislation on property introduced over the last two years, it reads like a checklist for a developers’ get-out-of-jail-free card (no criminal indictment? Check. No liability for building not according to plans? Check. Ability to double sell property and borrow against it even if contract lodged at land registry? Check. Ability to walk away from the limited development company and still retain all personal assets? Check…)

    3) As a result of 2), the developers had NO INTENTION of paying off the loans in the first place. Just look at the cars and other external signs of wealth we see all around us? A struggling developer would surely be paying off at least SOME of his debt and not splashing the cash? No, only if he felt he would have to at some point. If no-one is making him, then why on earth would he?

    The banks will only write off the bad debts ONLY after they have tried to come after us for the money (as we are the ultimate unwitting guarantors). Willbeg and Clive Fletcher are absolutely spot on. This government is borrowing against future gas and oil revenues from some REALLY SERIOUS PEOPLE and the working capital they will be trying to use in the meantime is US, who are desperate not to lose what we’ve already put so much time and money into.

    We cannot let them succeed…

  • Andrew says:

    While the banks are in write off mode they might as well write off all their developer bad debts and start giving back Title Deeds directly to hapless home-owners.

    Oops I nearly forgot It`s the home-owners who are unknowingly underwriting the banks. Maybe the banks will find a conscience, after all the whole world is currently protesting at their behaviour.

    (Andrew, if I may correct you on one point – those without deeds do not own their homes – Nigel).

  • Jim says:

    If a clear title deed was available at point of sale, this would go a long way to encourage buyers. Even carving up the building site into individual land title deeds,to be given at point of sale, would help. This would probably have to be done prior to building, in order to be ready at point of sale.

    As things stand at the moment, only the brave (or stupid) will buy with no title deed.

    Property developers bank loans, are Cyprus banks toxic debt. This combined with Greek bond holdings, do not bode well.

  • Denis O'Hare says:

    So it’s Catch 22 time for this Ponzi- style arrangement – now there’s a surprise!

    We at CPAG are in the position that we have seen the results of quite a few N50 searches for developer mortgages since we discovered and published the existence of this ‘facility’ some while ago.

    What we have seen in some lending situations is most shocking and shows the sheer recklessness of the lending and the position the banks have got themselves, and of course by extension the unwitting buyers, into. Readers may also remember this article, Banks face more serious risks says CPAG.

    The banks regularly give developers mortgages on land which are much greater than the actual value of the land, which magnifies greatly the underlying risk. This is bad enough, but the Land Registry personnel simply lodge these highly inflated loans against the title deed, so encumbering the future buyers, and certainly not informing them when their contracts are put in for lodging (for a fee, by the way).

    But wait a moment, aren’t these people the very ones who know the value of everything down to the last cent when it comes to charging transfer tax? And aren’t we told that lodging the sales contract gives the buyer full protection? It would appear not!

    Recently, the Lands Office announced the ratios, ‘based on statistical analysis’, being used to convert 1980 values into 2010 values which will be used as the future basis for property taxes. For instance if we take building plots in Paphos the ratio is 18, which seems reasonable.

    This suggests that if we take we take the 1980 value on a title deed in the Paphos area and multiply it by 18 we should get the 2010 value of that land. It would also seem reasonable that any mortgage on that land should not be more than 80% of that value, under the banking rules.

    Or put simply, if we divide the original mortgage on the site by the 1980 value on the N50 search the ratio should be on average less than 18. However, we are seeing quite shocking ratios, e.g. 183 (€5.5 million mortgage) and even a quite unbelievable one of 830 (€8.5 million) although this land might have been re-zoned and become a lot more valuable.

    Nevertheless, what is clear is that the underlying collateral values are highly inflated in some of the cases we are seeing and only exist because ultimately the unfortunate buyers’ properties are encumbered and the banks’ risk is somewhat covered.

    Perhaps Nigel can start a competition for who can come up with the highest 1980 value to developer mortgage ratio!

    Nigel’s article poses the question about what the banks can do? Unfortunately even as the ones to blame for this situation, very little, especially with their other exposure to Greek sovereign and domestic lending debt.

    Moreover, the developers who publish annual results have seen only decreasing sales and increasing losses over the past three years, whilst they struggle with their huge debts – this has to be an industry trend. This debt really is now toxic debt.

    Only Government action can save the banks, the economy and the buyers’ homes, something they are well aware of. See Can Cyprus benefit from the Irish experience?

    The Irish Government took decisive action in a similar situation even though many said the exercise would just be a further burden on the taxpayers, although the responsible body, NAMA seem to be proving some people wrong.

    I am sure that this organisation would only be too pleased to share any useful information which could help Cyprus.

  • willbeg says:

    Why should they? The banks will end up with all their property, land etc eventually. Then make a killing when the Gas/oil boys arrive.

  • Clive Fletcher says:

    I suspect the mysterious 2 billion odd loan from the Russians may well be used to cover the developers loans and other outstanding related construction costs. Selling the peoples oil and gas before they have even go it.

  • Denton Mackrell says:

    Is that a bird? Is that a plane? Er…. no it’s a puff of smoke. And there’s another and another. I can even smell it! Yikes, it’s a firesale!!

  • Costas Apacket says:

    Make bed…. Lie in it!

  • Robert Briggs says:

    They can reduce their prices ad infinitum but nowadays no one with any sense is going to consider any property in Cyprus (or elsewhere!) without full, genuine and immediate Title Deeds at point of sale, end of story!

  • Odd_Job_Bob says:

    Tee tum, tee tum…

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