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Now the storm has broken

Even now with irrefutable evidence that property prices are falling at a quickening pace across the island, one senses a sanguine mood that something will soon interrupt the decline.

IN APRIL 2010 asset manager Toscafund issued a discussion paper carrying the title “Storm clouds darkening over Cyprus“. This was not a meteorological warning, but an economic one.

The piece argued that two forces in combination threatened to send the Republic’s economy into a recession as challenging as anything it had faced since the devastation of the 1974 Turkish invasion.

On the one hand we cautioned the Republic of Cyprus (RoC) was vulnerable through its varied banking channels to the extremely unpleasant economic events unfolding in Greece. Added to this we warned that frenetic building had led to a significant over-hang of property stock across large swathes of the RoC. We argued the timing of events could not have been worse, with demand sliding precisely when new supply was still increasing.

Our conclusion was as clear as it was stark. We wrote “real estate across the RoC faces further downward price adjustments, possibly a halving in certain areas [and] those who view recent weakness in prices as an opportunity to pick up value will find no shortage of sellers. The market is far from its bottom.”

It is true the RoC’s property market has failed to record the weakness we had warned it would suffer through 2010 and 2011. The fiction of robust pricing can be put down to low transaction volumes.

property owners have delayed selling

Specifically, we are convinced that over much of the period since penning our research, property owners have delayed selling, for fear of what prices they would have to trade at. Low volumes and the resulting lack of pricing visibility has helped banks avoid having to recognise what otherwise would have been severe mark-to-market loan write-downs.

In short, the foreclosure activity we feared would be a feature of 2010 and 2011 has simply been delayed. Indeed, the evidence from the pricing data now being collated by the Central Bank of Cyprus suggests prices are falling gently.

prices could halve in certain tourist areas

As for where the market may bottom, the answer is that peak-to-trough prices could easily halve in certain over-built tourist areas, with property in Nicosia also cheapening by more than owners would feel comfortable believing possible.

In our previous report we visited the issue of where the economy of the RoC was heading. In our assessment we made clear that we saw no chance of any nation departing the eurozone. In the intervening period we have been steadfast in this view and continue to hold it even against the barrage of poorly informed arguments that suggest otherwise.

For all nations across the eurozone, the mechanism through which competitiveness will be re-established will be re-pricing. The simple truth is that wages will fall and asset prices with them, including property.

prices are falling at a quickening pace

Even now with irrefutable evidence that property prices are falling at a quickening pace across the Republic of Cyprus, one senses a sanguine mood that something will soon interrupt the decline.

Some optimists have argued ‘Russian money’ will provide the elixir for RoC’s property market ills. These and others have pointed enthusiastically to the “discovery” of “considerable” gas reserves deep in the RoC’s territorial waters. Still others expect a concerted government fiscal programme to revive the RoC’s economic fortunes.

Indeed, confidence that Moscow will provide assistance has been boosted by news that Cyprus has received the second tranche of a €2.5bn four-and-a-half year, 4.5 per cent loan pledged by Russia, a considerable injection when put alongside the RoC’s fiscal deficit in 2011 of €1.6bn and overall gross debt of close to €10bn.

Should we see Russia as the RoC’s salvation? We believe that even though further “friendly” loans “with no strings attached” from Moscow (to quote from the Cypriot finance minster) are likely to be forthcoming, this will at best ease the economic pain rather than avoid pain altogether.

It is notable that the figure the RoC was hoping for was four times greater than that which was ultimately forthcoming. It should also be remembered Russia extended a loan not a gift, albeit at a rate less onerous than the RoC would have faced in the open sovereign debt market. Why are we so sceptical of a “Russian rescue”?

Cyprus is Russia’s closest ally

There is little doubt that Cyprus is Russia’s closest ally of those countries within the eurozone and amongst its closest of those in the EU. There is also little doubt that economically Russia promises a far stronger outlook than does the EU in aggregate.

However, those expecting Russia or rather Russians to generously bail out Cyprus might like to consider this point. Opportunities exist widely for enriched Russians to spread their wealth, and many of these options are in economies whose currencies are more “affordable” than the euro. Opportunities also exist in markets that offer better value since they never enjoyed the asset price growth seen across the RoC.

asset prices will have to fall significantly

The reality then is that before the RoC can hope to attract further tranches of Russian rescue capital, all asset prices will have to fall significantly as an inducement. In essence, additional Russian rescue capital will arrive into the RoC, but only after the painful correction in asset prices we warn looks certain.

Even if further capital were forthcoming there is the issue of precisely where it might and might not be welcomed across the RoC, and on what terms?

As much as Cypriot property will fall into Russian ownership, one has to question whether it will be allowed to enter as freely into the Cypriot banking sector, neither as deposits nor into their ownership. Much like the hope that oil and gas will prove some magical cure for the RoC’s worsening economic problems, so those expecting a Russian remedy will be disappointed.

It is widely believed Cyprus can “extract” itself from its problems if only it can extract the considerable oil and gas reserves amassed around it. Those rallying around this hope might like to consider two issues. First, the logistical challenges in extracting from contested waters. The second is the time it will take to arrive at a point where the RoC’s sovereign oil and gas extraction is commercially viable.

Let us close this short reprise with lines we ended in our far more extensive piece two years ago.

“The picture we have painted will be seen by enthusiasts for Cyprus as bearing poor resemblance to the robust economy they recognise. They may well defend their case by arguing our negative outlook relies on a number of correlated shocks whose likelihood is far from certain.

“Notable here is a Greek banking crisis; currency collapses across Southern and Eastern Europe and further weakness in the Spanish coastal property market. It is true that were these not to detonate the RoC would avoid the worst of what we have suggested awaits it.

“Economic enthusiasts for the Republic of Cyprus will also be frustrated by our insistence there is little than can be done to forestall events. All this is true. We are wishing no ills on the island, and genuinely hope the dark clouds passing over do not unleash the severe storm they threaten. We are however not confident they will simply pass.”

From the vantage point of May 2012 few can deny that the storm we claimed threatened Cyprus has broken.

About the author

Dr Savvas Savouri is partner, chief economist, and chief investment officer of Toscafund, an established asset manager based in London and Dubai. The firm was founded in 2000 by Martin Hughes and is part of Old Oak Group, a large, well capitalised, financial services business. This includes Cheviot, a private client asset manager and Penta, a private equity business.

Readers' comments

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  • Pete says:

    Part of the problem is that those making the laws that govern title deeds etc are not the ones losing money from a crumbling building industry.

  • Odd_Job_Bob says:


    Thanks for the info. I hear what you’re saying, but I don’t believe the EUR 6bn figure.

    The IMF’s view on Cyprus developer debt, from the report, is this: “The most salient risks come from commercial banks domiciled in Cyprus. These banks have the strongest links with the local economy”.

    They talk about “the deterioration of their loan portfolios in both Greece and Cyprus”. They admit that “A focus on domestic commercial banks is warranted by their large size …(and their)…significant interaction with the local economy” and that” Domestic commercial banks have assets of €92 billion, or 5 times GDP… The(ir) asset portfolio ….. consists largely of loans (66 percent); followed by holdings of securities (16 percent);…. Direct lending in Cyprus is €30 billion (166 percent of GDP), of which the bulk, €24 billion, is to Cyprus residents. Greek asset exposure amounts to €23.4 billion in direct loans and €4.7 billion of Greek government”.

    So, even to the IMF, domestic commercial lending is bigger than exposure to Greece. They also go on a bit about “Further deterioration in loan portfolios” of 90-day arrears, which has increased by a whopping FORTY ONE PERCENT!

    But, like MiniMe to The EU’s Dr Evil (have you seen the amount of government expenditure items that the EU deemed “off-balance sheet” in order to get countries to meet the Euro entrance criteria? Truth, Lies, and Euros), the Cyprus Banks are mini-masters in obfuscation.

    THE IMF don’t know the half of it and tacitly admit, “further analysis would be needed to determine if assets classified as liquid would, in fact, prove to be so in a crisis situation”.

    So, how much DO the developers really owe?

    I, and many others, when having a bit of a rummage around, have been SHOCKED by what we’ve discovered. The article below could well have been written by me (but it wasn’t – honest!)

    The author arrives at his own calculation of how much is outstanding, but my own meagre calculations are significantly more frightening (when you bear in mind amounts used to build, further advances at LTVs when prices were hugely inflated, penal interest rates as NO developer I interviewed was making any repayments, and then multiply this by the 100,000 or so SOLD properties without deeds, then add all the money borrowed against unsold and sometimes even un-built property which in terms of numbers can be EVEN GREATER than the number of built and sold untitled property) and the figure is HUMONGOUS.

    However, we will only ever know EXACTLY if the Cyprus banks are forced to open their books. This will only ever happen if they need an EU/IMF bailout. This will only happen if there is no default and the Euro remains.

    Any article that talks about Cyprus debt problems but doesn’t even MENTION the elephant in the room of developer debt (plus, now rather ridiculously, stakes its life on no country leaving the Euro), is hardly a fair assessment.

  • Gavin Jones says:

    I consider Dr. Savouri’s assessment to be a fair one.

    However, I have my own additional observations.

    Much (most?) of the current economic woes on the island have been self-inflicted: bloated public service with inordinately high staffing levels, salaries and perks; Popular Bank debacle; continued hegemony of the public service unions; government unable to access capital markets; Mari catastrophe. There are others which I won’t catalogue here.

    I would now like to focus on another thorny issue which invariably seems to be either ignored or skated over but which has a very great bearing on the Cypriot property scene: the title deeds scandal. In line with many other articles, no mention of this has been mentioned here.

    There are over 40,000 properties bought by non-Cypriots who’ve been waiting years for theirs. I won’t go into too much detail as to why this is but suffice it say that in thousands of these cases, the developers have mortgaged the land (unbeknown to the buyers) upon which these properties stand. Word is now out in the wider world as to what is going on and sales are virtually non-existent as a result. Couple this with the global downturn and you have a disaster.

    Furthermore, if you look at the prices of Spanish properties and what you get for your money and compare them with those in Cyprus, you’re in for a shock.

    As a rider to this, it has been estimated that Cypriot developers owe the banks in excess of €6 billion, most of which is doubtless secured on the land I previously referred to and which is worth considerably less than its original value.

    The author ends by stating that the storm has broken. It certainly has and it’s going to get a lot worse on all fronts.

  • @Odd_Job_Bob – Have you read the article in the New York Times Greek Crisis Leaves Cyprus Mired in Debt.

    The mountains of developer debt is only part of the problem.

    According to the IMF, Cypriot banks have outstanding loans or other money at risk totaling €152 billion, or eight times the size of the country’s gross domestic product. (The developers’ share of this has been estimated at €7 billion).

    The complete IMF report, dated November 2011, can be found at Cyprus: Selected Issues Paper; IMF Country Report No. 11/332.

  • Peter G Davis says:

    Should we see Russia as the RoC’s salvation?

    Russia uses ports in Syria and for that reason gives support to the current Government. But if this changes the harbour at Limassol has been bought and paid for. Only cost €2.5b.

    In Cyprus its who you know, failing that buying friends never goes amiss. It also shows support for our President.

  • John Swift says:

    Got to agree with Robert Briggs regarding title deeds but this must be coupled with the fantasy prices of property.

    Unless some other nationality comes along very few Brits will buy.

    Detached houses must fall below the UK prices (not London/southern).

    Around 2006/7 properties reached monopoly prices this has got to revert.

    People want it to be how it was in 2001 when you could sell up in the UK and have a tidy sum left over, now it is the reverse, you still need a mortgage to buy in Cyprus.

  • Odd_Job_Bob says:

    Has anyone ever been savaged by a wet lettuce before?

    OK, then does anyone speak Greenspeak?

    In brief, Greenspeak is the language adopted by many economists and made popular by a one Alan Greenspan, the former Chairman of the American Federal Reserve. He prided himself on being able to give a speech and have two diametrically opposed factions BOTH think that his speech was an eloquent defence of their position.
    I quote: “if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said”.

    According to the above analysis, the two twin threats are the Cyprus’ banks’ exposure to “the extremely unpleasant economic events unfolding in Greece”. Also, there’s the frenetic building which has led to “a significant over-hang of property”.

    Hold on a sec’.

    Anyone who’s lived in Cyprus for even the teeniest amount of time could tell you that one of the main things that strangles this country is the total inefficient – jobs for the boys you can be as incompetent as you like but it’s whom you know that counts-culture.

    Oh, and it’s OK to rip off foreigners.

    But this is not THE main thing that’s gonna sink this place faster than poor old Engelbert on Saturday night. Not ONCE does the above article mention the MOUNTAINS OF DEVELOPER DEBT on both sold and unsold property that will completely swamp Cyprus banks. This has had massive knock on effects on virtually everything but most importantly for us, on the fact that no-one in their right mind would consider buying a property that may be repossessed at any given moment due to the developers’ debts (made possible by the Great Title Deeds Scam).

    The above article would have us believe it’s down to property repricing (i.e. Cyprus property is too expensive), “the Greek banking crisis; currency collapses across Southern and Eastern Europe and further weakness in the Spanish coastal property market”. OK, these things don’t help, but really? C’mon guys!

    Now here comes the savaging with a wet lettuce bit: “It is true that were these not to detonate the RoC would avoid the worst of what we have suggested awaits it” and that “there is little than can be done to forestall” these dark clouds from outside that may pass over, (even if Dr Savouri doesn’t think pass by they will).

    Nowhere does it even hint at suggesting that the devious practices of banks (and probably government) cooking the books to lend far more money than they could ever justify to their mates to build far more stuff than they could ever sell that nobody wants or has any trust in has anything to do with the coming storms.

    Whenever one points the finger (at all the events happening outside of the country, that certainly don’t help), there are always THREE fingers pointing right back atcha.

    Just tell it like it is guys.

  • @mbEyes – another thing people commenting do not appear to appreciate is that Cypriots make up the vast majority of those buying property – and they have the same problems as foreigners.

    The government and the property industry needs to regain their trust as well.

    Even though the Greek language media rarely reports on the problems, the message is getting through.

    A friend of mine recently sold his house in Kolossi – and it was viewed by twelve Cypriot couples. Every one of then asked if he had the Title Deeds.

  • Maxwell Hannah says:

    I am afraid I have to agree with Robert Briggs. The only thing that will have a huge effect on all of Cyprus’ woes is the giving of Title Deeds, and for Developers and Banks etc to do something to get people (foreigners) to start trusting them so people will start buying here again. It’s no big deal give everyone a chance to get their Titles without all the forms & red tape and scams that never seem to end, and the government will have all the money they want.


  • mbEyes says:

    Agreed, a very good article from someone who obviously has gone into this a great depth and can describe the ongoing situation lucidly.

    In response to so many who continue to bring up the subject, and at great danger of incurring the wrath of even more, whilst I accept that obtaining title deed to ‘your’ property is undoubtedly extremely important just what difference would it make today?

    Would it make it easier to sell in the current climate of over-supply and in-comers not having the money to spend (largely because they can’t get cheap loans backed up by their homes whose value has also deteriorated)?

    Would it lessen the probablity of banks foreclosing on property bacause unscrupulous developers have re-mortgaged the land again? Just because you might have owned it in the proper sense doesn’t mean the bank wouldn’t want to take it, as they have it as security.

    Would it stop developers selling property twice or not building to granted permits?

    Yes, title deeds are very important, but at this time they wouldn’t have made much of a difference at all.

  • Andrew says:

    Property prices will fall to the bottom of the pit and the banks will come along and repossess what “they consider to be theirs”. Then we can all go back onto the open market and buy back our worthless homes for peanuts. This time with TITLE DEEDS and NO developer bad debt.

    Simples solution Sergei!

  • Robert Briggs says:

    Once again, I have noticed that these experts and specialists have not mentioned a significant cause of the Cyprus property slump, which is the Title Deeds scandal and the developer hidden loans malpractices, ad nauseum.

    So in their articles & reports, why have these problems not been mentioned? Awaiting answers from these people.


  • Martyn says:

    A sane, solid and welcome depth analysis which confirms very much that many of us have been saying here over the last 2 years. The added pressures and potential further ‘diversion’ whilst Cyprus proudly holds the EU Presidency from July may well, in my view, further slow essential remedial economic actions and further intensify the pressures across Cyprus into 2013 and probably well beyond. And will the 2013 Election bring any sharper focus and action? Hmmm, personally not optimistic!

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