THE DEFINITION of Market Value is the amount someone would pay you to own what you have. Leaving aside how Market Value is calculated, this statement makes two fundamental assumptions: (i) that you actually own the asset in the first place and (ii) that you can transfer its ownership.
These may seem rather obvious, but ownership is not always guaranteed. With property rights being an essential part to facilitate economic growth, their lack can create serious complications in the working of the economy and of business in general.
Property rights are effectively a bundle of rights that include the right to use the good, to earn income from it, to transfer the good to others and to enforce your property rights. In a nutshell this means that you have guaranteed ownership and control over the asset, for you to do with it pretty much whatever you please.
In real estate, property rights, and in particular ownership, typically come in the form of a Title Deed. Title Deeds or lack thereof, are a sore point of the Cyprus real estate market having gone from being one of the best selling points of acquiring real estate on the island to the prodigious evil for all those involved in the sector.
The problems stem from two very different sources:
Firstly, Cyprus suffers from land fragmentation and from ownership of a site being divided amongst various owners in the form of shared ownership. These ownerships / Title Deeds are highly illiquid as no one wants to own part of a property, as you have to consult with others in deciding what to do with your own asset limiting development options and uses of the property.
Secondly, in order for a Title Deed to be divided, say a Title Deed of a plot of land into ten Title Deeds representing the apartments that have been constructed upon it, the building must receive a Certificate of Final Approval that it has been constructed according to the relevant permits and that all property taxes relating to this property are paid prior to the division of the Title Deed.
With the relevant government departments taking their time to inspect properties due to inefficiencies and a backlog of buildings, laws that are too rigid to allow for problem solving that result in stalling or dead-ends, and the economic crisis causing inability to developers/owners to pay their taxes, it is close to impossible to issue Title Deeds under the current system.
The lack of Title Deeds is important, as it means that property rights are not protected – both for the owner and the financial institution that has granted a loan using a property as collateral.
Question No. 1 – In the example above, who is the owner of the flat? The person who owns the land on which the building has been constructed or the person who deposited their purchase contract at the Land Registry that they have bought that flat? According to the current regime of calculating the Immovable Property Tax (IPT), the owner is the one to “whose name” or “to whom” the Title Deed is registered to. Hence the mess with how IPT should be calculated and levied.
Question No 2 – If a property does not have a Title Deed how can a bank foreclose on the asset in the case of default? The law allows for lenders to go to court in order to foreclose on a property, whereby the Land Registry will sell the property at an auction in order for the lender to recover its debt. However, the Land Registry cannot sell something which has no Title Deed because it will not be able to transfer that property’s rights to someone else.
Question No 3 – For risk assessment purposes, what is the value of the collateral of a loan for which the collateral is a property with no Title Deed? I think that the answer is clear from answering question two above.
Cyprus’ ticking time bomb
Nirvana’s final studio album, their masterpiece ‘In Utero’, turns 20 this September. After listening to Kurt Cobain, YouTube proposed a number of songs based on my previous choices.
With PIMCO’s and KPMG’s reports assuming SME’s non-performing loans rising to 57% and 45% respectively for 2013, the most suitable song that describes what will happen if the lack of property rights isn’t tackled very soon is Will Smith’s, ‘Boom! Shake the room’. You can listen to below or be reminded that its refrain, which goes: ‘Boom! Shake-shake-shake the room, Boom! Shake-shake-shake the room, Tic-tic-tic-tic boom!’.