CYPRUS BANKS may be exposed to greater risks in the property market than those reported by rating agency Moody’s last week, according to the leader of the Cyprus Property Action Group.
As the 8 percent rebound of real estate transactions in the first ten months of the year indicates only a sluggish recovery of Cyprus’ property market, buyers left with no Title Deeds because their properties have been mortgaged by developers have no possibility to resell, said Denis O’Hare. This comes after the island’s property market saw prices fall 8 percent in 2009, which the Central Bank says may fall a further 4 percent this year.
This price decline will put additional pressure on Cyprus banks, according to Moody’s. The exposure of Cyprus’ banking system to the real estate sector was 20 percent on corporate loans totalling €20.1 million in March, according to the Central Bank. This ratio translates into over €5.7 billion of total real estate debt in March this year, down from €6.3 billion a year before. This 8.8 percent annual decline followed a 66 percent increase in March 2009 compared to the year before.
Cyprus’ banks may face additional risks in the form of fines based on provisions of the European Unfair Commercial Practices Directive. This was transposed into national law in July 2007 and states that it is a violation for a business to omit or hide material facts from buyers, which if had been made known would have influenced the buyer’s purchasing decision.
Violators face a fine of up to 5 percent of their annual turnover or €256,290. In addition, preventing the Competition and Consumer Protection Service of the Ministry of Commerce, responsible for the implementation of the legislation, is an offence punishable with a fine of €85,430 or a six-month prison sentence or both.
O’Hare said the banks have violated the consumer protection law in question. “The banks that have a loan agreement with a property buyer are supposed to inform the buyer about material facts. As they know that the developers have mortgages on them” and “first priority” in foreclosures if the developer’s mortgage turns in to a bad loan, he said.
The CPAG leader said there has been evidence of banks “trying to cover their reckless lending by rescheduling loans and handing out even more money,” a practice that led to the intervention of the Central Bank. The latter asked commercial banks to “act within the rules for declaring and reporting non-performing loans. What is now crystal clear is that this orgy of lending has created a toxic debt time bomb for the banks with the developers unable to service the debt because of the world recession“.
Downward spiral
Non-performing loans to Cyprus’ real estate sector as a percentage of total real estate loans rose to 4.4 percent in March from 4.2 percent a year before, or to €251.3 million from €231.8 million, according to the Central Bank. This translates to an increase of 8.4 percent in bad loans in the real estate sector.
O’Hare warned that unless the government acts now to prevent a “downward spiral” of the property market the banks will be left with “many collateral properties with highly inflated debt on them” which cannot be resold.
“Local buyers who are struggling with mortgage repayments could cite the EU law which made it an offence for the bank not to inform them of any developer mortgage and simply cease to pay it while they seek redress. In addition, foreign buyers who were sold property investments using buyer mortgages will have reason to just walk away from these bad investments. This will mean that even more developers will go bust,” the CPAG leader said.
