THIS article provides an outline of three topics: societal turbulence, the state of the Cyprus economy, and opportunities in the property market.
It is important to examine these topics in tandem, as one cannot scrutinize the property market without taking into consideration the state and outlook of the economy, which in turn is being affected by (and forms part of) the workings of society.
A crisis is when you cannot say “let’s just forget about the whole thing.” Whilst previous “mini crises” have been swept under the carpet, this one is not going away. The main reason is that banks (and coops) form such an integral part of the workings of the economy and of society, that there is an interlinked loop between the three. Thus, whilst other crises could be “isolated” and forgotten about, this one lingers on and on.
The problem isn’t just a deepening recession, however serious. We face a conjunction of three large events – the implosion of the debt-based finance-capitalism that developed over the past twenty years or so, a fracturing of the euro resulting from fatal flaws in its design, and the ongoing shift of economic power from the west to the fast-developing countries of the east and south. Interacting with each other, these crises have created a global crisis.
How do we solve the problem? There is no silver bullet. We need to start by accepting that the problem is here and that any problem cannot be solved by using the same level of thinking that created it. In other words, if you screwed it up, you can’t fix it. Is it logical to expect that the same politicians, bankers, consultants and bodies will solve the problems which they themselves helped create?
The solution to the problem is likely to unfold at the end of a “black swan” type event, i.e. a rare event that will in turn lead to catharsis, like a war or a revolution. Until this “rare event” occurs, we will continue to move from one failed solution to the next, and thus from one crisis to the next, as the system struggles to survive whilst imploding at the same time.
We apologise if we sound too philosophical about this, but we call it how we see it.
A classic example of the system’s struggle for survival, is the recent announcement/letter of the Association of Cyprus Banks that they are “concerned” that the definition of non performing loans that the Troika may use in calculating the recapitalisation its members require, will lead to big(ger) losses for local banks.
The letter goes on to state that the Association should be invited to (I paraphrase) “explain to the Troika the nuances of the Cyprus banking system”. What does that mean? Well, that the same banks that are likely to require circa €8.0bn to €10.0bn to be recapitalised, want to send the same decision makers who caused the need for the recapitalisation to explain to those who will give them the money how to do their job. Nice.
In his introduction to first year students taking his finance module, Professor Robert Shiller, one of the leading researchers in real estate finance, gives a simple explanation of how finance works: “a bank lends you money and charges you interest for giving it to you. If you don’t pay the money back, it takes the collateral and sells it in order to get its money back. If it can’t get its money back then the system doesn’t work and the bank will run out of money.”
The Association of Cyprus Banks is worried about Troika’s definition of “non performing loans”. The definition used by the Cyprus Central Bank is that if a loan is not being serviced for more than 90 days, i.e. if interest is not being paid on the loan, and the collateral is valued at less than the loan, then the loan is deemed to be “non performing”. However, the international definition is that if a loan is not being serviced for more than 90 days, then the loan is deemed to be “non performing”. The argument of the Association is that a loan’s collateral can be sold and thus the money paid back to the bank (as per Professor Shiller’s definition).
However, in order for that to happen (1) property rights must be absolute, (2) the foreclosure process must be efficient, (3) the sale of the asset must be forthcoming. With 130,000 properties not having title deeds, a foreclose process lasting at least 6-10 years, and the entire banking system having no liquidity, how likely is that any collateral will be sold? Yeap, that’s the problem right there. The system made a rule that “obstructed” the true nature of non performing loans and now wants to maintain the definition in order to safeguard its survival. For the past three decades nobody spoke about this, because banks were (and are) the “sacred cow” of the economy. As the saying goes, “a good slogan can stop analysis for fifty years.”
Cypriot property market
This leads us to the third topic, of opportunities in the property market. It is important to note that the property market is not dead. There are circa 1,000 transactions concluding every month, with the property markets of Paphos and Famagusta beginning to show some early signs of recovery (albeit from a very low base).
Buyers are of course concerned about the state of the economy and of banks, but with prices at 30-50% off their 2008 peak and the sterling up against the euro by 20-30% since 2009, Cyprus property is becoming an attractive option especially for overseas buyers. The top end of the market is also performing quite well, with sales of “exclusive” houses and apartments continuing above trend.
We do not expect a rebound in transaction activity or prices, but a slow pick-up in activity and progressive stabilisation of prices in Paphos and Famagusta (we remain negative for the other districts; particularly Nicosia’s, whose labour force is dominated by bank and public sector workers). With more locals choosing to study in Cyprus and rent housing for longer, opportunities will arise in student housing and serviced/ managed apartments. We also note the rise of smaller companies setting up a physical presence in Cyprus, requiring serviced offices and good quality residential units for their staff.
The “game” now is less about volume and more about quality of product and service.
We look forward to the forthcoming changes in the workings of the banking industry and to the Cypriot economy as a whole. We remain concerned that society is not ready for the difficult path ahead, and that leadership will not be up to the required standard. The only thing to be certain about is that turbulence brings with it change and that with change come opportunities.
Pavlos Loizou MRICS
Lead Consultant, Leaf Research