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Banks should offload distressed properties

The banks need to offload billions of Euros of property left on their books by bankrupt developers and offer 100 percent mortgages spread over 40 years, similar to those being offered in Spain.


CYPRUS’ three largest banks, Bank of Cyprus, Popular Bank and Hellenic Bank are involved in ambitious capital raising exercises to cover massive losses sustained on their Greek sovereign debt exposure and distressed property holdings in Greece and Cyprus.

The attempt to reach the capital targets may however not be successful if the banks don’t rush to offload distressed and non-core assets.

Bank of Cyprus and Popular Bank have already disposed of their assets in Australia and Popular Bank recently completed the sale of more subsidiaries in east Europe, but the proceeds from such sales is not enough to cover the massive capital injections that the banks need.

The banks need to offload billions of Euros of property left on their books by bankrupt developers, who would have gone under if it had not been for the vain attempt by the banks to keep them afloat. Cypriot banks appear to think that the people are stupid and they will rush to buy property at current inflated prices when they know well that sooner rather than later, banks will offload the distressed property.

The question is not if, but when.

And the way to offload the distressed property is very simple and is already being done in Spain with great success and I’m sure will be repeated in Cyprus soon. Two weeks ago, Reuters had an article on how Santander, the euro zone’s largest bank, offered a two-bedroom apartment in Sesena area near Madrid with a communal swimming pool for €65,000, with 100 percent mortgage over 40 years, costing as little as €242 a month to service, about a sixth of the average Spaniard’s monthly income.

At the peak of the decade-long property boom that preceded the crash, similar apartments would have sold for at least twice that, and for properties it isn’t selling, a Santander mortgage would cover 80 percent of the property price over 25 years.

Like Santander, most Spanish banks offer 100 percent financing over 40 years at interest well below the market rate to get rid of the homes that sit on their balance sheets, eating up capital in provisions and costing money in taxes and maintenance.

Guess what? According to Reuters, the apartments were selling so fast that the banks could not fill in demand. The banks in Cyprus similar to those in Spain, Greece and other countries should realize that since it was their stupid lending schemes that created the property bubble in the first place, they now need to fix the problem by at least offering the distressed property at huge discounts to attract interest.

Local property experts will quickly realize who much Cyprus property is expensive compared to similar property offered in Spain and Greece, which is also on the radar screen of foreign buyers.

Banks also need to offer 100 percent mortgages spread over 40 years, similar to that being offered in Spain to allow Cypriots who were forced out of the property market to come back and purchase decent property at affordable rates. As the Reuters article revealed, the €242 a month mortgage offered by Santander in Spain is about a sixth of the average Spaniard’s monthly income.

Assuming that the average monthly income of a Cypriot male is €2,250 a month, such a ratio would mean a monthly payment of €375, spread over 40 years.

Vassos Shiarly, the new Finance Minister knows the banking industry better than anybody else and he also has the experience and knowhow on how the lending market should develop from here onwards. He needs to impose tough conditions on the banks to go back to basics, sell non-core assets and distressed property, offer affordable mortgages that among others will allow banks to slowly repair damaged balance sheets.

About the author

Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice.

Readers' comments

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  • Robert Briggs says:

    @Mr Janner, 22-4 2011 at 11:53am. The EC will make a decision by June 2012, whether or not, for the Cyprus Authorities to be investigated by the European Court of Justice regarding these horrendous property abuses (ie; Title Deed scandals, etc / ad nauseum) & their lack of action to resolve these matters.

    So the EC/EU will be proved to be fit for purpose or not fit for purpose, when “The Moment of Truth” arrives. Watch this space. R.B.

  • Janner says:

    Would Cyprus really be allowed bail out money? I cannot believe that the ECB would be so negligent with our money.

    There are thousands of property buyers who were lied to by the ‘system’ and not told about debt on the land their property was built on. I find it incredible that Cyprus would be entitled to a bail out of EU money when it has clearly misled so many people. It is wrong. Why are the authorities so afraid to tell it how it is.

    If the ECB provide funds for Cyprus then they are giving a green light to this sort of activity. The EU will be saying, “Go ahead, don’t tell purchasers that the loan they are taking out for their home is sat on land that has a huge amount of debt already, so much so that no one actually seems to know how much”.

    It is just unbelievable. How can we be expected to abide by the rules when those in a position of authority blatantly flaunt them! Where is our protection.

  • Odd_Job_Bob says:

    Hi Simin,

    This is the new, uncontroversial OJB here, so I completely agree that there will be NO government bailout, NO ECB bailout (not just because the EU doesn’t have the money but forcing creditors to take a hit of more than 70% of their investment and by useless IOUs as Greece has done is a default in all but name. No, wait a minute, if it’s not an “official” default, then the insurance that the creditors have taken out to protect themselves in the event of a default never gets triggered and the insurance providers – the banks – don’t take an even BIGGER hit. Crafty, EU, very crafty) and we have no idea how this will all end.

    But, we DO have a previous example of something ENORMOUSLY similar…

    Have a butcher’s at the Argentina story:

    http://www.csmonitor.com/Commentary/Opinion/2012/0402/Greece-should-follow-Argentina-into-default-and-devaluation

    In brief, “Although the immediate aftermath of devaluation and default in Argentina was grim…. Argentina is basically locked out of the international credit market….after 2002, the economy began a remarkable turnaround. From 2003 to 2011, output doubled, exports almost tripled, and unemployment dropped by two-thirds”.

    I have this theory, based on chess (that I’ve been banging on about for decades, it seems): if you estimate that your opponent will do the best possible move, you can anticipate that move and then counter it. Thus, if we assume that the people who run this country are no mugs, they KNOW of the above example. The “grab all you can now and you won’t have to pay for it later cos you can simply say “No mas!”, as long as you may have some sort of high-demand commodity to flog on after is all intentional.

    They’ve estimated that Eurogeddon will happen way before the extent of the terrifyingly bad lending ever comes to light (remember, it only did in Greece as Papandreou’s socialists decided to own up) and, if they have enough cash flow coming in so the economy doesn’t run-aground in the meantime, they may just pull this off. That’s where we (and mates’ rates Russian loans) come in.

    To counter, if (hypothetically, of course), we starve them of their cashflow, the whole plan comes crashing down. Who knows, at some point in the future, we may even see justice…

  • Simin Edwards says:

    Hey Bob, thanks for the reply. So no day of reckoning, no ECB check on assets and liquidity? For sure no government bailout, so an EU bailout? Maybe not especially after Greece pans out and the German anxiety. You’re right about the finite limit that was envisaged that was very perceptive, but being finite it will end, but just how it ends is my point of interest.

  • jon frazer says:

    What a euphemism! “Distressed property”

    What about tens of thousands of distressed/scammed buyers?

    Scammed by developers, lawyers, banks and the inaction/complicity Cyprus government.

  • Martyn says:

    Looks very much as if the Cyprus property/banking ‘fans’ are going to be turning a particularly nasty brown colour just about when it takes on the Presidency of the EU in July!

  • Martyn says:

    There seems to be a naive assumption in the article that the Cyprus banks/property/legal situations mirror those of Spain – they clearly don’t- and that therefore the same ‘solutions’ should ‘work’ – and they surely won’t; the Cyprus situation is far more complex, not least because the banks have lendings to developers and to buyers, and because so far the whole Cyprus ‘system’ has remained in denial, with the Government so weak that they haven’t yet started to address the maga-serious implications, longer-term, of addressing these complexities, these overlapping fundamental conflicts and corruptions.

    Nigel is right to point to Ireland and what’s been happening there to start sorting some of the long-term hangovers from the ridiculous, un-regulated property/property lending boom;at least Ireland largely avoided through their legal systems the ‘double lending’ that is compounding matters here, and they’ve been scything through their public sector numbers and costs, forcing through severe ‘austerity’ measures that, painful as they have been, are starting to work.

    And Spain, before the recent bank sell-off initiatives, had in several ways, at several levels, been addressing the chronic impacts of the earlier massive Property boom/bubble. (There were Default, Distress and Disposal ‘stalls’ in many Spanish tourist airports 2-3 years ago, effectively the market forces facing up to realities of the massively over-blown tourist property markets.) It will likely take years, and that needing a new Government prepared to address the fundamental issues particular to this country, to address the unique Cyprus fault lines, before any real progress can be made.

    So, let’s hope the ECB take the essential measures, sooner rather than later, to force the Cyprus government and banks to take the severe actions necessary to kick-start the remedial processes.

    It will be painful – and take many years to fully impact, but the sooner this starts, the sooner we may all see the fundamental structural changes/impacts that will see Cyprus ‘fit-to-trade’ property-wise. Fasten your safety belts, folks, it’s going to be a VERY rough ride!

  • Costas Apacket says:

    Welcome back O-J-B!

    Glad your move back to civilisation went OK.

    Bet you can’t get used to someone calling you ‘My Friend’ and actually meaning that you’re their friend and not ‘Give us your money and then sod off back to where you came from’.

    One thing is for sure in Cyprus, if their is any way out of the dilemma the ‘artful ways’ will try and find it.

    Let’s hope the ECB/IMF get there first and move this Island 100years into the future at a stroke!

  • Odd_Job_Bob says:

    Simon, this is my point: no balance was intended. This was a buy now pay (maybe) later Ponzi scheme. I, and many others on this forum, have stated quite openly that, upon membership of the EU, Cyprus banks could borrow huge amounts at interest rates that they never could have dreamed of before (just look at government bond yield spreads per EU member country compared to ECB base rates! Was looking for a graph to demonstrate Cyprus’ perceived financial stability pre and post EU accession, but I got bored).

    Basically, Cyprus banks borrowed loads, over what they knew would be a very finite period (until ECB/ IMF troika teacher came back into the classroom) and lend it to their rusfetti mates (under some pretext or other, say building property for funny foreigners).

    You quite rightly state that developers’ assets should be targeted, but they, despite all the opportunities to do so, are simply not. It really isn’t just by coincidence.

    The IMF/ ECB troika teacher would eventually come back into the room to invigilate (if the doddery old fool hadn’t died in the meantime, which is more likely to happen than not) but, by then, the errant pupil will have absconded from the classroom to live to con another day. The day of reckoning will not come and Pandora will have kept her box intact. Best go long on Cyprus Pounds…

    It really is a well-orchestrated plan and we are just caught in the crossfire. British Expat 0 v Cyprus Rusfetti (Lawyer/ Politician/ Property Developer) 17,003 (declared).

  • Simon Edwards says:

    The Gordian knot is not so simple I’m afraid. The system that was encouraged did not have an end or a balance sheet, but could only continue in an upward spiral. If every project is re-mortgaged it means that builds & sales must continue at no point does anything balance. It doesn’t work in reverse. Unless developers assets can be targeted then I see no solution.

    The only good news is that the truth will come out, I just cannot see anyway of avoiding it. I’d love to be a fly on the wall when the IMF open Pandora’s box. That’s the day of reckoning as far as I can see.

  • Odd_Job_Bob says:

    Odd job Bob is back!

    Did you miss me?

    I’ve been busy back in Blighty (gosh, it’s hard work readjusting – it’s like fast forwarding into the future) but now have a few minutes to share with you my unadulterated wisdom.

    The Cyprus banks CANNOT organise a fire sale. Well, not for now.

    At the moment, they have declared huge debts against lots of property, some sold, some unsold, all of which is in the name of the developer (due to non-issuing of title deeds for the sold stuff). We’ve talked before about penal interest rates on non-performing loans and we’ve done a little bit of a calculation re: if a developer hasn’t paid any interest on a property that went up in value, then down, he’s in negative equity. If we factor in that more than one loan has been taken out on the SAME collateral, then the LTV, as mentioned in the excellent comments made by Mr Louizou below, is MANY HUNDREDS OF PERCENT. Yes, I know it seems bonkers but those is the apples.

    Now, the banks need money to survive. They aint never gonna see a penny from the developer. The government haven’t got any (yet, depending on whether or not we believe the gas and oil pipe dream – I thought that one up myself!) The European Union can magic some up from somewhere (i.e. Germany!), but nowhere near enough to shore them up, even if their debt asset ratios could be believed.

    The only place they can get any dosh out of is the Good Old British Expat. The threats of repossession, made-up-on-the-spot charges etc. are all just to squeeze the udders completely dry.

    Ouch.

    Only once this process is complete and the GOBEs either slope off home (as I’ve done!) or exhaust their remaining dosh in the EUCHR, the banks can repossess and sell. However, this will be crystallising their huge losses (plus only a nutter would even think of buying until rock bottom is reached), so they won’t.

    How does this all end?

    By the end of June, they have to declare to the EBA their exact positions. There will be hedging and fudging and, erm, obfuscation, but they are hoping that by the time they have to come clean, the Euro will be a distant memory and the full truth of their Spanish Practices (I think it’s about time we changed that expression as the Spanish are angels in comparison) need never see the honest light of independent scrutiny.

    The international reputation of Cyprus banks will be so low it’d have to reach up to scratch a snake’s belly, but, if the pipeline dream materialises, it won’t matter. A bit of future whitewashing/ restructuring/ renaming, plus THEN a fire-sale at distressed property fund prices (have a look at Florida. Oh, and guess who will get first pick of the repossessions/ abandoned properties?) and the world will again be willing to do business with this lovely island.

    If it hasn’t been completely mortgaged to Russia by then…

  • Andrew says:

    Can anyone estimate the current open market value of a property bought and paid for in full in 2007, for €400,000. The buyer has not been issued with Title Deeds because the land on which the property is built has a huge unpaid mortgage taken out by the developer (which the buyers lawyer failed to notify him of).

    What do you think a realistic distressed, knock down, fire sale, price could be, in today’s market?

    Mr. Loizou, would you care to market such a property?

  • @ Hilda – According to the International Monetary Fund, Cypriot banks have outstanding loans or other money at risk amounting to €152 billion; that’s eight times the Cyprus gross domestic product.

    I understand that the co-operative banks are healthy – it’s the commercial banks that have the problems.

    By the end of June, all banks must demonstrate to the European Banking Authority that they have enough capital to be viable. Banks that cannot do this will face pressure to accept government bailouts or, in extreme cases, be shut down.

    But the Cyprus Government hasn’t got any money because Catastrofias has given the €3.2 billion left by the previous government away and has borrowed a further €2.5 billion from Russia!

    So where are the banks going to get the money that will allow them to continue?

    The Irish government set up the National Asset Management Agency (NAMA) to address the serious problems which arose in Ireland’s banking sector as the result of excessive property lending. NAMA has acquired loans (land and development and associated loans) with a nominal value of €74 billion from participating financial institutions. Its objective is to obtain the best achievable financial return for the State on this portfolio over an expected lifetime of up to 10 years.

    Maybe Cyprus could do something similar if it could find the money?

    At the present time, very few properties are being sold and it is difficult to see who will be prepared to buy distressed properties – even at a knock-down price. And if thousands of properties were to suddenly come onto the market at a knock-down price, there would be further downward pressure on property prices across the board.

    If anyone has a solution, I suggest they write an open letter to the Finance Minister (and include me on the distribution).

  • paul lambert says:

    On the surface it seems like a good idea but after just a moments thought and you and see the problems that may be caused. A ‘fire’ sale of properties at way below current market prices will kill the property market altogether. Those currently desperate to sell in order to get themselves out of the hell that is a foreign currency mortgage, will have no chance. Institutions like Alpha Bank who not only arranged mortgages for ‘investors’ but had also, at the same time, allowed the developers such as Alpha Panareti to mortgage the land up to the hilt, cannot possibly see this as a way out. Brits owe them money, developers owe them money (on the same properties!).

    Why would any developer continue to build and invest, knowing that tens of thousands of properties will flood the market at rock bottom prices? Cyprus is incapable of handling this crisis because of the level of corruption that pervades the state.The Cypriot people have not been brave enough over the years to raise any protest (or perhaps its because they were mostly benefiting from the plight of British property buyers, seeing them as easy prey.

    Well, now the pigeons are coming home to roost and I hope those guilty parties will get what is coming to them.

    I suggest to all Cypriots that you now let your voice be heard and when your elections come along, vote this current shambles of a government out. If you don’t then you will get exactly what you deserve.

  • Hilda Nixon says:

    It would be interesting to hear Nigel’s views on this article.

  • steve says:

    Good idea , but still goes back to the same old song. Who would take on a mortgage even for 20 thousand euro over 40yrs if you never get the title deeds. We are still no further forward with this scenario.

  • Alex says:

    If I understand correctly, local banks simply MAY NOT sell property related to non-performing loans. Or, rather, they may do it purely theoretically, since the legal process involved takes years. Therefore interest rates, purchase price, mortgage duration and other mathematically and economically sound details become completely pointless.

    I read only last week that the relevant legislation, enabling banks to put up mortgaged property for sale, was turned down “as inappropriate in the current economic environment” (or something like this run the reason).

  • Alan Waring says:

    @Pavlos Loizou. Echoing others, a solid and succinct commentary. Thanks.

    @Gavin. Re the core of the overall problem, I had to invent a new term for it some 2-3 years ago: sovereign corruption.

  • Gavin Jones says:

    Pavlos Loizou.

    I’m certainly no expert in this field but what you’ve written appears to me to make excellent sense and displays a certain realism which has regrettably not been expressed publicly by many (anyone?) in the construction industry and its related businesses. I applaud you.

    The key to your piece is your final paragraph.
    Would that property developers, banks and lawyers had heeded your sage sentiments many moons ago.

    However, it’s successive governments which have to shoulder ultimate responsibility for the current, catastrophic state of affairs. Their inertia in getting to grips with the fundamentals, the reasons for which we all have our suspicions, will continue to have a severe impact on the Cypriot economy.

    Unfortunately, the omens do not look promising.

  • mharpen says:

    At least Spain is STARTING to deal with their problem. Property is still overvalued and has a long way to drop before attracting serious buyers.

    Cyprus is long way from doing anything. They are still in denial and the whole system is corrupt to the core. Cyprus couldn’t do what Spain does as their problems are different. Property prices in most cases are still way overvalued. Why? Because the Bank refuse to clamp down on developers and demand repayment which is delaying the inevitable. Even Banks are saying they have not down-valued property, this makes their books look good, but in truth they hold billions of toxic debt with no hope of repayment.

    The Cyprus property market needs to burn down to the ground, which it will, before it can rise from the ashes IF and WHEN the problems are addressed. Don’t hold your breath!

  • Peter says:

    The banks are obliged to follow correct banking procedures, part of which, under the rules of accounting, is a provision for “Bad and doubtful debts”

    If the Banks are being less than honest about the service of these debts they leave themselves open to action by the EBA.

    It also effects their ability to take action against people who have paid in full for their homes when the banks have been negligent in collections against developers, who took out mortgages on property they have sold.

    In there is also the part played in this mess by Lawyers and Government. All involved need to answer questions?

  • Pavlos Loizou says:

    An excellent article that highlights the major problem that lay before us, but also misleads by “copy-pasting” the example from Spain.

    The example refers to a 100% loan, something which is currently not permissible under the rules of the Cyprus Central Bank. The maximum Loan-To-Value (LTV) ratio is 70% for a second home and 80% for primary residence. Also, if you work the numbers back to find the interest on this 100% loan, you will see that this is 3.75%. Obviously this is not possible for a Cypriot bank which relies on funding from deposits and not from bonds (and deposits are currently at 4.25-4.75%).

    Leaving rules and interest rates aside, it is important to note (as many will know from first hand experience) that loans are not a panacea. Assuming a more “realistic” interest rate of 5.5%, a loan duration of 40 years, and a monthly payment of €375 (as per the author’s recommendation) the net effect on the ‘purchase price’ of the asset is €104,000 (70% loan), €91,000 (80% loan), and €72,500 (100% loan). Thus, the bank has a counter-incentive in granting a bigger loan because it will dispose of the assets at a lower price (plus the borrower/ buyer has “no skin in the game”).

    A side note with regards to the salary. It is sexist to rely on a male’s salary and erroneous to quote the mean (the median is better as it excludes very high and very low earners). The median salary in Cyprus is currently €2,000 per month. Assuming the same ratio of 1:6 (repayment to salary) the monthly payment should be €333. The consequent effect on the ‘purchase price’ of the asset are 92,500 (70% loan), 81,500 (80% loan), and 65,000 (100% loan).

    A final note as to the loan’s repayment period. 40 years is a lot time and given that the end of loan should be before someone’s 70th birthday, these loans would target only young people thus limiting the market.

    Somehow I am not confident that debt is the answer to our problems. Lower prices, title deeds, security of ownership, better/ strict regulation, etc need to precede any recovery in the property market or else we will soon be in the same mess (but with more debt in hand).

    PS And yes I am an agent and a valuer (and a lecturer and a good cook)

  • Richard says:

    “Assuming that the average monthly income of a Cypriot male is €2,250 a month”

    Never assume – this figure is about double the average wage here and that’s if you are lucky enough to have any work.

    And we still have the title deed issue to contend with.

  • Robert Briggs says:

    Will these properties have full, immediate & genuine Title Deeds at point of sale? If not, once again, do not touch with a barge-pole.

  • Costas Apacket says:

    Good article Shavasb, however I’m not aware that the Banks in Spain provided double loans on the same assets as the Cypriot Banks appear to have done on a large scale.

    If a Cypriot Bank wants to sell a distressed asset such as a piece of land where an outstanding Developer loan exists and also where the Bank has provided further loans to fund individuals making property purchases that sit on this land, then we have a problem don’t we?

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