REAL estate in the Republic of Cyprus has been popular with foreigners who own about 100,000 homes – in a country with 803,000 people. The British alone, whose colony this was until 1960, own more than 60,000 homes. Turns out, real estate is Cyprus’ national sport sponsored by dumb money.
But now it has become a nightmare that is unravelling the finances not only of expat home owners, but also of developers, banks, and the government. Yet it’s hushed up. By comparison, the banks’ impending losses on Greek sovereign debt, significant as they are, seem outright manageable.
“The most common mistake people make when buying property in Cyprus is to use a lawyer who has been introduced or recommended to them by a property developer,” says Nigel Howarth who has helped foreign property buyers in Cyprus for more than 10 years. Foreign buyers are sitting ducks. They’re unaware of the local business culture and don’t suspect that their lawyers are in cahoots with developers–aided and abetted by the banks.
The country acceded to the Eurozone in 2008, but it’s already in a heap of trouble. A recent loan agreement with Russia of €2.5 billion will keep it afloat for a few months into 2012. Then it’s bailout and haircut time. On October 27, Standard & Poor’s cut Cyprus to BBB. The big problem: exposure of its banks to Greek sovereign, corporate, and bank debt. But not a word about the title-deed scandal and the billions that evaporated with it.
As in the U.S., after years of speculative overbuilding, the real estate market is collapsing. Building permits are down 40.2% for the first eight months of the year and 49.4% for August. Home prices have dropped for six consecutive quarters, according to the Central Bank. The steepest declines were in the coastal regions favoured by foreigners. Of the 45,000 unsold properties, many are unfinished, and some are essentially abandoned. The Cyprus Property News points out that they “were built for buy-to-flip investors and are unsuitable for permanent living.”
Prices would have dropped even more steeply if the banks had dealt with their non-performing loans. But instead of pressuring developers to sell properties to service their loans, they’re pressuring appraisers not to reduce values so that loans appear to be adequately secured.
These kinds of issues have cropped up in the U.S. as well. What’s unique in the collapsing housing bubble in Cyprus is a title-deed scandal of unimaginable proportions. And it has embroiled waves of foreign buyers.
“The bulk of the problems stem from the archaic Ottoman land law still in existence in Cyprus which allows these dubious practices,” writes the Cyprus Property Action Group. Insufficient industry regulation and lacking enforcement of consumer protection laws also play a role.
The scheme works this way: A developer takes out a mortgage on the land but hides it from foreign buyers. The bank retains the title deed as collateral. When the developer sells the property, the buyers’ lawyer, who is in cahoots with the developer, doesn’t perform a title search and doesn’t “discover” the original mortgage. Buyers, assuming that their part of the property is free and clear, either pay cash or take out a mortgage. The developer pockets the money instead of paying off the original mortgage. The bank goes along because it can collect interest on one or two mortgages. But it retains the title deed as collateral for the original mortgage, and the buyer never sees it.
Throughout, buyers are told by everyone, including the government, that a buyer of immovable property is absolutely protected once the sales contract is lodged with the Cyprus Land Registry, and that they don’t need the title deed.
Meanwhile, as the property is still under construction and buyers are overseas, the developer strikes again. Alan Waring, an international risk management consultant, explains:
“Some cases have also involved alleged ‘double selling’ fraud whereby the developer sells a property to Party A, fails to lodge the contract with the Land Registry, and then sells it again to Party B (possibly for a higher price) but fails to reimburse Party A.”
Proving fraud in court seems to be impossible. In a recent double-selling case, the judge ruled against the plaintiff: lodging of a sales contract at the Land Registry does not mean that buyers “automatically and in perpetuity have become the ‘owners’ (as they mean it) of the residence,” she wrote. Hence, only possession of a title deed confers protection against double selling.
But the bank still holds the title deed as collateral for the original developer mortgage, and it has the right to foreclose on the property. Under normal circumstances, it takes a bank between 9 to 12 years to obtain control over the property. So banks extend and pretend until the developer goes broke. Then they move to recuperate a property that one or two other “owners” have paid for…. A nightmare. And no legal resolutions are in sight.
The numbers are stunning. In this tiny speck of a country with 803,000 people, about 130,000 properties are still awaiting their title deeds. If the average value of these homes is €150,000, then nearly €20 billion worth of properties might be in dispute, many of them with more than one mortgage and more than one owner.
The banks aren’t talking. And they aren’t writing down their assets to reflect the layers of mortgages that are worthless. Developers are going bust. The money they pocketed has disappeared. Expat homeowners who don’t hold title deeds are terrified of losing their homes, even if they paid cash. There are no legal processes in place to resolve this. Estimates of the missing money range from €3 to €6 billion—enough to take down all Cypriot banks. By comparison, the banks’ exposure to Greek sovereign debt is estimated to be €4.2 billion, of which only half will have to be written off.
In response to the impending haircuts on Greek debt—and not to the title-deed scandal, which continues to get hushed up in the hope that it will somehow go away—the Cabinet approved draft bills to recapitalize its banks and create a fund to stabilize the banking system. But there is no money to put into the fund (see EFSF, so leverage it?). A package of austerity measures has been approved. It includes such stalwarts as cutting 1,100 already vacant positions in the civil service and reducing entry-level salaries for civil servants by 10%. However, the government did blink in the title-deed scandal and revised some of the Ottoman property laws—a great example of too little too late.
“It wouldn’t surprise me that all those who bought properties in Cyprus might in the end be forced to pay additional money if they want to keep what they already paid for,” said my source in Cyprus.
And in Greece? “Tax fraud is a national plague,” said Greece’s finance minister after he found that Greeks owed $50 billion in back taxes. But it’s complicated…. Greece’s Extortion Game.
By Wolf Richter at The Testosteronepit – where the truth comes home to roost.
@Costa, if Greece goes under basically the whole global economic system will freeze up (Lehmans on a much bigger level), we may say yes, serve Cyprus right, but what about all the other countries that will be stuffed? Italy is following fast and there will be no bailout fund big enough to help the multi trillion debt mountain they have…anyway nuff said..let’s see what the local banks do? As you say the ECB base rate is down and in theory banks should reduce their lending rates to reflect this, but hey we forgot they have had a haircut profits down and they need to recoup them…wot a mess
Blow me! The ECB just cut the EU base rate to 1.25%.
My crystal ball is definitely working today!
Must have switched it on when I rolled it down the stairs earlier.
Chances are there’ll be another ECB base rate cut in December followed quickly by the 50% to 100% haircut for the Cypriot Banks.
Looks like it’s going to be a worrying Christmas for most Cypriot Bank employees.
I predict that Greece will be out of the EU by next summer at the latest. You heard it here first!
Just thank God we haven’t still got Charilaos telling us everything is fine.
Let’s see what happens to mortgage rates in Cyprus if the Cypriot Banks suffer the highly likely 100% Greek haircut, and in the same period, the ECB cuts interest rates to stimulate Euro area growth.
Methinks the Cypriot Banks will try and justify higher mortgage margins yet again.
What am I talking about? – ‘Will try and justify?’
They’ll just whack them up without telling anyone – yet again!
Yup all going down the loo, sad thing is that post 1974 the recovery was a miracle considering how many were left with just the clothes on their backs and the recovery was mainly due to hard work of these people, but what we have witnessed in the last few years is greed taking hold….@Heath, if the gas comes so will the Turks….
Maybe what goes around does come around!!
What an incisive dare I say it brave article. Of course this is a colossal problem that is part of a larger issue. I speak with people all of the time that actually think that the problem will just go away. Another scary thing that I hear a lot is “no, we’ll be fine – we have the gas coming”. This sentiment is, quite frankly baffling.
The unpalatable truth of the matter is that it will take some eight years for Cyprus to see a single Euro from the sale of the gas. Don’t forget that there needs to be a refinery too costing billions that simply does not exist. So – the alternative is a pipeline to Europe going through guess where? Yup – Turkey. Imagine the conversation “Hi Turkey, Cyprus here how are you? You know that gas that we have that you think is yours, can we pipe it through your country please and sell it?……” Never gonna happen.
Qatar had the right idea by sending in third party land valuation experts who gave the Cypriot authorities a taste of reality by telling them that the land was wildly over valued and to stop being silly. My advise, get your money offshore and start protecting yourself.
@Denton – Bank shares took a hammering yesterday, pushing the Cyprus Stock Exchange to a new record low.
Shares in Marfin Laiki fell to a 52 week low of 0.217.
Shares in the Bank of Cyprus also fell to a 52 week low of 0.930.
I expect we’ll soon see their employees rattling collection cans at traffic lights.
No longer a haircut – a scalping surely?
Just wait until the Greeks decide in their forthcoming referendum to give the Cypriot Banks a 100% haircut!
The systemic rot in the property sector that we have all been raging about for years is only a symptom of the wider malaise in Cypriot society that Mr Polyviou scathingly attacked in his official report on the Mari-Vassilikos disaster.
In paraphrase, he alleges in chapter 11 that a relentless pursuit of vested self-interests by politicians and officials coupled with their incompetence, empty rhetoric and a “reduced perception of duty and selective observance of morality and legality” has resulted in a deeply cynical and mistrustful populace. Cronyism and clientism hold sway. No one wants to take personal responsibility in case of being held accountable, so decision avoidance, laissez faire and buck passing have become the norm. This permeates downwards and outwards from the top of government into the public and private sectors and across society. To quote his report:
“The responsibility for the disappointing state of affairs…..is now understood by all as timeless and accumulated. The tragedy at the Mari naval base reflects not only a colossal failure in this case but the failure of the political system in general. In this case, nothing worked…..Many public servants….showed sloppiness, avoiding responsibility and demonstrating self-evident cowardice against political leaders. There was complete collapse of the system (which of course is staffed and led by people, political officials and civil servants). It was very naive to believe that the recent tragedy is a single of an unexpected event”.
Try swapping ‘of the Title Deeds scandal’ or ‘of the Cyprus property collapse’ for ‘at the Mari naval base’ in the above passage.
As one antidote, Polyviou has recommended (chapter 10) the establishment of an Independent Commission Against Corruption. This is long overdue and I suggested such a move in an article in Financial Mirror in 2007. An effective ICAC is not just a whistle-blower’s charter (although whistle-blowing is important in identifying corruption and gathering evidence). From my association with ICAC officials in Hong Kong, for example, I know that it also carries out in-depth investigations and prosecutes cases. It also should cover all business activities and persons and not just politicians and civil servants. Those convicted and sentenced to long jail sentences in Hong Kong have included senior police officers, senior civil servants, barristers, solicitors, chief executives and directors of major corporations an many others.
@Andrew re lawyers recommended by developers.
Yes, but what a gamble!! Worse than Russian roulette!
The author is quite correct in stating that the most common mistake buyers make is to use a lawyer recommended by the developer.
One such lawyer was discovered to be in bed with the developer – literally! A greater conflict of interest is hard to imagine from a buyer’s perspective.
So the answer for the 100,000 home buyers is don’t pay any more money. Take out all of your money from any Cyprus Bank. Finally stand shoulder to shoulder and repel any attempt at eviction by the Banks.
The article is very good but the tired old cliché about developer recommended lawyers is a bit unfair. Many people in many different countries do safely use a lawyer recommended by a property developer.
A lawyer is a lawyer no matter who recommends him or her.
Maybe that’s why they say. “This is Cyprus”. “WELCOME”
Sums it up perfectly; Cyprus the land of money grabbing, dishonesty, nepotism, indolence and now with their head in the sand.
IT WILL HAPPEN, CYPRUS WILL GO BUST AND NO-ONE WILL CARE.
There is no will to fix the problem and seems to be no one with the astuteness to do so.
Where is all the money? In the hands of the lawyers, developers and dishonest agents.
I had resolved not to post any further comments on this website after receiving a well-aimed punch on the nose for suggesting that the Cypriot Authorities might like to publish English translations of their rather baffling legislation on the so-called law of ‘specific performance’ and the like.
However this outstanding article stimulates me to comment again on the matter of banks and their accounting practices.
Suppose Bank C is in trouble with these figures showing up as liabilities:
Deposits (Owed to customers) 1Bn
Borrowings(Owed to creditors) 1Bn
Capital & Retained Reserves 100M
That is only a 5% ‘Core 1’ capital ratio and the assets on the other side of the balance sheet comprise mostly loans to people who are unable to repay. The regulators don’t like it.
What can the directors do?
Easy; lend 100M what’s left of depositors and creditors money to a few major shareholders so that they can subscribe to new shares in the bank.
Hey presto, Bank C has 200M in Capital and a ‘Core 1’ ratio of around a healthy 10%. That should keep the regulators at bay for a bit longer.
Of course, I am not suggesting that any banks in Cyprus would embrace such a dodgy practice.
The trick from the hapless owners point would somehow, repeat somehow. get their original Contract of Sale with the developer made “null and void” through the developer failing to meet deadlines, design agreements, issuance of title deeds etc………..
If, and a very big If, successful, buyers could then have their contracts amended and resubmitted – done properly this time. Or, big if again, get their money back and compensation from the government if the developers have gone bust, which they will.
The only place that buyers are likely to get fair justice is the European Courts or even the Court of their own country. If done collectively this would also prevent the many foreclosures the banks are bound to start to try and recoup some of their exposure.
In my opinion, I’m not a lawyer, signing up for the Amnesty will be interpreted by the Cyprus government as buyers agreement to pay off all the loans, taxes, Immovable Property Tax and Property Transfer Tax on the property in order to obtain Title Deeds. They keep making it easier and easier to sign up for the Amnesty don’t they? I wonder why?
Thank you – a concise and comprehensive take on what’s unfolding…
WoW! Such a powerful, wide-ranging article, that if, as it deserves, it gets into the international, especially European/Eurozone/North American media will start sounding the very loudest alarm bells for the whole island, not simply those without Title Deeds, with unfinished properties but also those will other than nominal funds still in Cyprus banks, for what will Cyprus government guarantees on Deposits count for when the entire economy goes, very belatedly, “belly up”.
The Russian loans might help the Government hold off for a while longer introducing the severe measures and fundamental economic and structural changes that are needed, but the Days of Reckoning for the entire Cyprus legal, financial and social structures surely cannot now be very far away.
Those of us who’d dearly like to remain living here had better hope there is Lots of gas under Cyprus’ Mediterranean sectors, but are not seen as some kind of Salvation that means the fundamental structural problems still don’t get sorted.
Thousands of Cypriot people were made homeless by the Turkish invasion in 1974.
Now the Cypriot Banks and property industry establishment appear to be heading for a repeat of this feat, but this time the property owners are not foes, but friends and fellow Europeans.
The crazy thing is that the Cypriots seem to think they’ll get away with it.
They wont.
Unfortunately this sums it up rather well.
Are the Banks not breaking some international banking regulations by keeping these debts off their books for so long?