What kind of institutional investors are likely to invest in Cyprus?
The type of investors that demonstrated interest to invest in big real estate projects, in which Emergo Wealth has acted for both the buy and sell side of the investment, includes mainly foreign High Net Worth Individuals (HNWI) and institutional investors (i.e. private equity firms, financial/investment companies and hedge funds).
For commercial and mixed use real estate projects (depending on the size of the investment), the interest is primarily from foreign investors. Some local investors are seemingly willing to invest but mainly in ‘distressed assets’ with significant market value discount.
For residential real estate properties, in the Q1 2014, almost 30% of the sale and purchase agreements involved foreign buyers (mainly from Eastern Europe, Middle, Far East and the UK). There has been an increase of interest from local buyers but again such investors are always looking to invest in ‘distressed assets’.
Local sources of funding investments are limited as there has been a significant flight of private capital and the domestic institutional investors (pension and provident funds) are already over-invested in local real estate properties.
Earlier this quarter, the government has announced changes to the criteria by which the citizenship is granted to investors. The amount necessary for foreign investors to secure a Cypriot passport is reduced to €2.5 million for someone participating in a collective investment worth at least €12.5 million. This program has proven to be effective and we believe that the new criteria will be welcomed by investors from the Eastern Europe and the Far East (China).
How realistic is it to expect investments from institutional investors in the above fields?
It is realistic. In the next few months, we do expect that some more deals will be announced mainly concerning hotel/tourism real estate investments. As Emergo Wealth, we believe that Cyprus has started regaining the international investment community confidence vote, as we have seen an increase in interest from institutional investors.
We represent numerous foreign investors that have already arrived in Cyprus. Together, we review specific assets and projects, looking at opportunities to invest in anything from large-scale real estate projects (mainly in the tourism/hotel industry), to operating hotels and/or acquiring non-performing loans/assets, etc.
As previously mentioned, these sophisticated investors have seen this scenario play-out elsewhere (Spain, Ireland, Germany) and they know that in two or three years the economy will start growing again, provided that the country streamlines its public sector, strengthens its supervisory bodies, and restructures its banking industry.
What do institutional investors want to see? What will they take into consideration when making investment decisions?
Obviously, these investors are here (or want to come) to make money, some short-term and some long-term. They are interested in investments that are at a discount in terms of market value and they are also keen to acquire assets that have some form of an ‘exit’ strategy in place. The problem in Cyprus, is that due to the limited demand and liquidity (especially during the last few years), investors are particularly worried as to how they could possibly exit from specific investments, i.e. dispose assets in the near future. Today, it is very easy to get in (acquire), but tough to get out (sell).
Furthermore, foreign investors are increasingly cautious when it comes to actual asset due diligence, thus, thoroughly investigating both the underlying financial and legal aspects of a transaction (i.e. the title deeds and charges on the estate has been one of their major priorities).
We recommended that all investors take into consideration the actions outlined below:
- Formulate a specified strategy and define assessment criteria.
- Review of individual projects/assets against the predefined strategy.
- In-depth examination of projects that meet return and risk profile (reviewing risks and exit strategy).
- In-depth due diligence.
What kind of returns are the foreign institutional investors are expecting from investing in real estate projects in countries like Cyprus?
In Cyprus, investment yields is a term not frequently used. It is widely acknowledged, that yields are a useful analysis tool demonstrating the relationship between rent and property prices.
At the end of Q4 2013 (RICS, 2014), average gross yields stood at 3.8% for apartments, 1.9% for houses, 5.3% for retail, 4.5% for warehouses, and 4.3% for offices. The parallel reduction in capital values and rents is keeping investment yields relatively stable and at very low levels (compared to yields overseas). This suggests that there is still room for re-pricing of capital values to take place, especially in the commercial real estate.
What is your advice (bullet points) to project owners in Cyprus such as Real Estate Developers, Hotel Owners, and other Entrepreneurs? What do they need to do to be considered eligible and to have a reasonable chance at least to be considered by institutional investors?
- Rational pricing – adjust asset prices to reflect market conditions.
- Those who have a mortgage on their assets need to review asset pricing with their bankers to ensure the lowest pricing that the banks might be willing to accept in order to release the mortgaged assets. Companies are urged to do so before entering negotiations with institutional investors.
- Obtain professional advice to prepare investment presentations and highlighting project attractiveness (i.e. ROI, unique selling points that could provide the edge needed to make an asset stand out from the crowd).
- Evaluate the local market with comparable project characteristics and values (forget about 2012 pricing, institutional investors are not interested in purchasing assets at historic top-of-the market valuations).
- Coordinate the preparation of disclosures and other required documentation (i.e. title deeds, building permits for any work done, etc.).
- Perform roadshows to major investment destinations (again professional advice might be needed).
- Create bundles or portfolios of properties that can be collectively sold to investors (Government incentives are provided for such collective schemes).