FOR THE CYPRUS PROPERTY sector, the current worldwide ‘credit crunch’ in banking adds to other hazards that may affect its attractiveness as an investment destination.
Credit Crunch Hits Cyprus Property
In May 2007, the local press reported that bank loans for building and construction were up 31% year on year to CY£2.36 billion. By July, the Central Bank had lowered lending ceilings from 70% to 60% and banks were instructed to readjust loans to developers.
In short, the Central Bank in July perceived the credit exposure as risky even then. Since then, as a result of large-scale bad mortgage loans in the USA, the whole level of risk to the worldwide banking system and finance sector has risen significantly, with Europe badly affected.
So, what? If Cyprus is in the same boat as every other country, why is there special cause for concern about property risks in Cyprus?
The answer lies in the way that Cyprus property developers secure their loans and the way that the Cyprus Land Registry releases title deeds.
Cosy Collateral
How do developers in Cyprus secure their massive loans for their capital building projects? Clearly, as most of their assets are in property, they can use the title deeds from one set of properties as collateral for a new or extended loan for new projects.
Because few regulatory restrictions apply, Cyprus developers have had a field day with racking up huge loans on the back of ‘other people’s homes’. Thousands of people have bought property in Cyprus in good faith and have paid in full yet are unable to secure their title deeds because unbeknown to them the developer has used the deeds as collateral to fund further capital programmes. Either this or the asset value of the untransferred title deeds is used to boost the balance sheet and perceived creditworthiness of the company.
In the event of loan repayment default by the developer, the banks will have first call on these assets – which could well happen if the credit crunch continues or there is a continuing shortfall of buyers or, heaven forbid, the bubble bursts.
The Cyprus Property Action Group (www.cyprus-property-action-group.net) is receiving a growing number of reports of cases where purchasers have ‘discovered’ that the developer has an outstanding loan against the property ( e.g. see website case study “criminals in our own homes” ) and therefore the title deeds cannot be transferred.
A National Scandal
One major property developer tells potential clients in their brochure that it can take up to 2 years to obtain title deeds. In fact, currently, buyers can wait 10 – 15 years, or even longer, to become the legal owner of a property they have already paid for. As there are many elderly people buying here, in the event of death, inheritance of something they don’t own could also be a cloudy issue. For an EU member state to be operating like this in the 21st century comes as quite a shock to many buyers. Even Cypriots have called it a national scandal. Cyprus developers keep telling clients that the system is the same as the UK’s. It is not. In the UK and many other EU states, by law title deeds are handed over on the day of purchase completion.
All of this may eventually spell big trouble for the Cyprus economy, which is so dependent on tourism and property, both of which require very large numbers of foreigners to be happy with Cyprus.
A Way Out
CPAG, representing the buyers, strives to be a catalyst in addressing current property issues with the aim of making Cyprus the most reputable and safest place in the Mediterranean to buy property.
