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Property Developers: Run Forrest! Run!

If property developers fail to repay their bank loans, then the banks may not have sufficient funds to repay us the money that we deposited with them that they used to finance these loans.

Property developersMOST property developers still own a significant number of completed units (a figure of 50,000 unsold holiday homes was reported last October) and banks are putting under pressure to dispose of them as soon as possible.

Developers are overleveraged, and in their majority still own a considerable number of finished units and land. Banks are pressurising them to dispose of these assets as quickly as possible in order to pay back their loans. Developers are pushing back, asking for more time or for loans to be restructured by paying them back over a longer time period.

This article examines the dynamics between these two parties, through a simple mathematical example.

Andreas decides to build a multi-storey building comprising of ten apartments.

He has €200,000 in cash and needs €1,200,000 to buy the land and build the apartments. Andreas goes to a bank and borrows €1,000,000 with an interest of 6.0% per annum (€60,000) and a ‘bullet payment’ in three years (he has to pay back the €1,000,000 in three years and only the interest in the mean time). Andreas plans to sell the apartments for €180,000 each.

In the first year Andreas sells one apartment for €180,000. As he is very prudent, he pays the bank the €60,000 interest and keeps that other €120,000 on the side for the next two interest payments. Then the crisis happens. Andreas doesn’t manage to sell any apartments in years two and three, but he has the money to pay the interest from the sale of that one apartment.

At the end of the third year he goes to the bank and asks for an extension to his loan of €1,000,000. Property prices have now dropped by one third, they are at €120,000, and he has nine apartments to sell (a total potential income of €1,080,000 which is more than enough to cover his loan).

Andreas thinks that at these lower prices he can sell three apartments in the first year and two apartments per year after that. The bank is pushing him to sell all the apartments in a ‘fire sale’ for €108,000 each (a 10% discount). That means a total income of €972,000; €28,000 short of what they are owed. Is the bank crazy? Doesn’t it want its money back?

As things stand, Andreas owes €1,000,000 and has nine apartments. He sells three in the first year, and has an income of €360,000 and owes €60,000 in interest. Thus, he has a balance of €700,000 and six apartments left. He then sells two in the second year, has an income of €240,000 and owes €42,000 in interest (6% on €700,000). Thus, he has a balance of €502,000 and four apartments left. In the third year he sells two apartments, has an income of €240,000 and owes €30,120 in interest (6% on €502,000). Thus, he has a balance of €292,120 and two apartments left. In this final year he sells the last two apartments, has again an income of €240,000 and owes €17,527 in interest (6% on €292,120). Thus, after four years he still owes the bank €69,647 and has no apartments left.

The bank knows that the longer it takes Andreas to sell the apartments, the more interest payments are going to be biting into the amount it receives to pay back his outstanding loan. Thus, the bank wants to ensure that it minimises the amount of losses it has because it runs the risk of Andreas taking even longer to pay back the loan, which in turn means that the shortfall between what the bank is owed and what it will receive could be even greater.

The rate of sale matters almost as much as the price achieved. The bigger the loan and the higher the interest, the more important the rate of sale is. In the current environment where projects are overleveraged and interest rates are running high, the rate of sale becomes paramount.

Why should we care?

Well, the €1,000,000 borrowed by Andreas is the money that you and I deposited at the bank. If the bank doesn’t get its money back, then it won’t have any money to pay us back.

Pavlos Loizou MRICS VRS
Managing Partner
Leaf Research

Readers' comments

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  • Richard says:

    @ S.O.J.B

    I think we are in agreement that this is (not surprisingly) a US issue after all. Ironic really – considering that when Kissinger’s files were de-classified – the guy had apparently stated that he didn’t believe it was in “American interest – to go against the 2nd military invasion of Cyprus by Turkey”. He furthermore stated – when challenged about this later – that Cyprus was “not on his mind – due to Watergate”.

    So – he we are – 40 years on (great title for a play) with thousands of duped, screwed and fiscally challenged British subjects now in the “collateral damage” seat! OK – so we haven’t lost our lives like the 6000 poor ******s did in 1974 (apart from those who have already committed suicide over these shenanigans – unable to bear the stress any longer) but we ARE facing ruin.

    The fight is against the ransom demands and the conditions that led to this fiscal enslavement. Who in hell would have EVER bought these ‘assets’ if they’d have known the standards they would be built to – the slimy way the loans were structured to all the participants (the bent brokers & their bent lawyers sure didn’t spill the beans on that) – and there be no real chance of ever properly owning them this side of the next ice age?

    It’s those who hold power over this that is key now. In ‘traditional’ wars – the enemy is clear – they’ve in the past worn shiny black boots and stood under dodgy flags. Now – it’s not so clear anymore is it? They are cloistered here, there and everywhere – obfuscated by this, operating via that & protected by the other.

    The enemy needs to be flushed out and confronted. Ignorance and apathy are the main weapons the enemy has – that – and as you correctly point out SOJB – a healthy chunk of ‘I’m all righters – not fighters” who can pony up their debts and clear out of the fray (but how long in the world we now live in – before they enter another similar fray one asks)?

    The cruellest irony is – many people would subscribe to a fair and decent “win win”. But when your enemy is a cruel hidden force – they don’t “win-win” do they?

    Who is going to force them into “win win”? Time for that ‘special relationship’ eh?

  • Spirit of Odd Job Bob says:

    Janner, I completely agree with you about people being able to defend actions by the bank for repossession of their property due to developer debt. In any reasonable state, they would easily win, but in Cyprus, this issue is (deliberately) likely to run and run, with no clear outcome and will be a long and costly process. My view is that those who defend it will run out of money way before the banks do, which is the State’s intention (unless there is a co-ordinated campaign by those who refuse to be blackmailed). However, it SHOULD be defended, using delaying tactics as much as humanly possible (and trying to keep costs as low as possible) so hopefully, the Cyprus state runs out of money first.

    A MAJOR DETRIMENT TO THIS PLAN THOUGH is the people in the same boat as us who WILL PAY THE RANSOM (as it means the banks have enough money to string it out longer). So, if you’ve been given a demand of “Just pay us €X (including false IPT claims, developer debt, inflated transfer tax etc) PLEASE DON’T PAY (as it screws the rest of us up)! Hence my policy of “Deny the State money and they’ll run out before we do!”

    Unfortunately though, I KNOW that this request will fall on many deaf ears (the “I’m alright Jack” school of thinking). Or those who simply just don’t want to know. Ho hum…

    I believe that there is NO WAY the banks will sell off our homes (nor the liquidator will go after any developer assets in his name as there won’t be any!), not due to any moral reservations, but simply because THEY TRULY ARE NOT WORTH ANYTHING (which is why the banks haven’t been pushing for repossession with any real determination, as you state above). The reasons why they’re not?: sitting tenants whom you can’t evict for YEARS, badly constructed stuff falling down anyway, legal disputes, flood of such properties on the market, unpaid CGT and IPT (which takes precedence over ALL other debt) etc. Anyone buying it would be on the wrong side of extremely stupid, unless the properties were virtually given away…

    As admitted by a liquidator on this very forum a few weeks ago, the REAL target is our UK property, which the banks can only gain access to if we default on mortgages in Cyprus (and not because we refuse to pay developer debt). I’m not a legal expert (there are those on this forum who ARE though, so please chip in with your opinions!) but the Orams case of a few years ago I think is pretty unequivocal on whether or not we can use the excuse of being duped into buying in Cyprus – in the north OR the south – as a defence against seizure of other EU-based assets. The case of Apostolides vs Orams ECS Ruling. If we default on personal debts (such as our Cyprus mortgage), we should EXPECT Cyprus judgement enforcement in the UK.

    So, the debt against the property will NEVER be fully recovered (unless we allow access to other EU assets, so DO NOT DEFAULT ON YOUR CYPRUS MORTGAGE!) The only question is how much of OUR money will disappear before the whole thing crashes, either through general eurozone-wide default or, more hopefully, regime change in Cyprus forced from without. Please President Obama…

  • Janner says:

    @SoOJB. One more point. The liquidators may well want to chase assets abroad but they will be met with many defending this action on the basis that they were duped in the property buying process. It’s all been discussed here many times. That issue is not going away and the banks face a very real, a very public and very costly long court process. For many it is about title deeds.

    Others couldn’t care less about the deeds and would happily walk away or defend their position in Cyprus if push comes to shove. The issue of title deeds being issued has been answered. The question of how this debt is going to be recovered has not. The liquidators will also be going after whatever the developer has left and the banks will have to sell off the assets (our homes) used as collateral against the developer loans. It must be difficult as Cyprus banks need the cash but they haven’t really been pursuing this with any determination yet.

  • Spirt of Odd Job Bob says:

    Janner,

    Correct on all counts.

    We just need to see the behaviour of Cyprus banks towards the purchasers of its developer – debt ridden property to see what happens next. Some people WILL pay the ransom demanded and some will fall into the trap of defaulting on their own mortgages, thus rendering vulnerable their other EU property outside of Cyprus. When we bear in mind that the order of creditors in Cyprus is LIQUIDATOR FIRST (as published on this forum a few weeks ago), targeting these assets is RISK FREE for the banks (as they’ll claim it wasn’t them guv but the liquidator what did it).

    The Ukraine (read Crimea) situation I think brings home the strategic importance of Cyprus question. The Russian navy NEED the Black Sea base in the Crimea, having abandoned Tartus (Why Russia evacuated its naval base in Syria), relocating to Cyprus IS an option but much less sure, so will fight tooth and nail to hold onto it, knowing that we (or rather the Americans) cannot risk sending troops to defend the Ukraine.

    It then becomes a matter of prestige for the Americans to try to resist further Russian naval expansion, so they’ll be more likely to intervene in Cyprus if they feel Russian influence is growing (which it is!)

    However, the Cyprus establishment may still use the threat of further Russian collaboration to squeeze a better deal out for them from ‘the West’. We can only hope (plus send aid to Ukraine!)

  • Janner says:

    @SoOJB

    A comprehensive reply as usual. So, to summarise, the Germans will pay for Cyprus for as long as it suits them financially. Cyprus will do the absolute minimum (resisting change at every turn) for as long as they can until sufficient numbers of countries strategically default (or their natural reserves turn to gold) from the Euro. Either-way, it will all come crashing down at some point. It is a question of if and not when by the sounds of it. However, it looks like the Russians, Americans and the Brits will be busy in Ukraine (at least for a few days). At least we all know that it is highly unlikely title deeds will being issued as their is no incentive for the developers to pay-up. The question is, will the Cypriot banks be desperate enough to chase assets abroad or take on the many thousands of protracted court actions in Cyprus (10 years approx).

  • Spirit of Odd Job Bob says:

    Hi Janner,

    A sensible question was asked, so (an attempt at) a sensible answer will be given.

    But before I do, please read:

    Europe’s Growth Forecast Upgraded, But Ratio Of Debt to GDP Will Continue To Worsen In France, Spain And UK While Germany Continues To Improve.

    In brief, the largest economies in the Euro-zone (excluding Germany) cannot and will never be able to pay back what they owe.

    Whilst, as for the poster boys of the success of austerity measures: Ireland, Portugal and Greece, well, have a look at this for Ireland: Irish emigration at highest point since Famine — 3,000 leaving per month.

    In the words of the Unions of Students in Ireland president Gary Redmond:

    “Masses of highly skilled graduates are leaving for distant shores, taking with them the future prosperity of this island”. I’m sure I could find similar quotes in Portuguese and Greek.

    So, that’s working well then (“You’ve created a wasteland and called it “peace”” springs to mind..).

    Bottom line (and as you stated earlier): the EU (i.e. Germany) will continue to bankroll these economies (just enough for them to survive, not to actually get out of the hole they’ve created by being not very clever – say Ireland – or through downright devious corruption – Cyprus maybe? Scratch that, Cyprus DEFINITELY) – until it no longer serves the German purpose. As with Andreas above, there is more chance of the Americans launching another successful manned flight to the moon(?!!!) than of these debts being cleared. EVER. So of course Andreas will never bother, I mean, why should he if there is no comeuppance (and his Limassol “lyubovnitsa” would leave him for someone with more money)?

    What awaits is the inevitable abandonment of the ridiculous twice-previously failed single European currency and countries eventually doing an Iceland (defaulting, causing the crash of any large French or German banks that lent them the money in the first place). The only problem these countries will face, like Argentina in the 90s, is being shut out of credit markets. Which is a bit like the fear of being eaten by a sandwich (i.e. a sandwich, like a credit market, is an inanimate object artificially created to be used by countries which adhere to its rules. If we choose not to use it, but create another market of the countries refusing to obey its rules but set up our own, it has no power).

    Default is the way forward, but it has to be a collective default (so the indebted countries can trade with each other). The existing debt hole is so big that NO-ONE will ever climb out of it.

    The problem (opportunity?) we have though is Cyprus WILL trade on its strategic position (and possible natural resource reserves) because, as you so correctly state, Cyprus will NEVER modernise (just look at the parliament behaviour today where they refused to comply with Troika requirements to get the next tranche of dosh, then all resigned in protest, while the country is likely to go bankrupt WITHIN A MONTH!) By cosy-ing up too much to the Russians in a game of high-stakes poker and jeopardising the (British in name) Sovereign Base Areas, they may just over-play their hand and force the Americans (the real power behind our continued occupation) to act.

    I see that as the only possible way we (when I say “we”, I mean ALL of us, not just the few willing to pay the ransom) will ever get our title deeds.

  • Janner says:

    @SoOJB. I see your point but this all relies on someone paying for the debt to keep the banks afloat. Are you saying that the EU will continue to bankroll this madness? If so, we’ll still be talking about this years from now as the debt will never be paid. It also stops Cyprus modernising. Their property market will be dead for ever more and their economy will at best just tick over as the debt will constantly drag it down.

  • Spirit of Odd Job Bob says:

    And, (cos I really don’t have much to do at the moment), I’ve done some further figures (based on the above example) as to whether or not a developer will actually try to pay any of his debts, bearing in mind there:

    a) Is NO chance of him being prosecuted for criminal charges (by the bank or the hapless buyers);

    b) NO personal guarantees that he may have given (which he won’t have, if he’s been properly advised) will ever be enforced and

    c) He can close down his development company and maybe even start a new one at some stage (obviously, these get-out-of-jail-free laws are ALL coincidental) with NO COMEBACKS WHATSOEVER! Apart from maybe the mild feeling that he may be contributing to his country’s economic downfall (“but they’ll be alright once the blah blah comes in…”)

    Using the different scenarios of: 1) He makes NO payments to the bank AT ALL, 2) He makes all the interest payments he can (but by year 4 he has no money left so goes onto default interest rates of 13%) and 3) He pays as much interest and capital off as possible as soon as he can (I had to include this scenario, even though it’s possible this may not be the most likely…), at year 7, we have as follows (abbreviated):

    1) Debts Against Portfolio: €2,398,504.12, Developer Bank Account: €1,260,000

    2) Debts Against Portfolio: €485,009.95, Developer Bank Account: €0

    1) Debts Against Portfolio: €247,102.32, Developer Bank Account: €0.

    Starter for 10 and no conferring: Bearing in mind the extraordinary set of laws in Cyprus (some introduced since 2009) re: developer personal liability for debts incurred, if you were a developer, would you be an option 1), a 2) or a 3) man?

    Answers on a postcard please.

  • Janner says:

    But the EU keeps pumping money into the banks so they won’t have to make the tough decisions regarding NPL’s. Nobody knows how long Germany is willing to pay for propping up Cyprus. That is the real question…..just how long will Germany do this for? I suspect most of us thought things would have tightened sooner for the banks but with the latest troika report the gravy train rolls on!

  • Mike says:

    Does Mr Loizou really believe the developer’s are going to even attempt to repay their NPL’s. They may talk about repayments but that is where it will end. Empty words and sadly for Cyprus and it’s people an industry decimated and exploited by a minority in the name of greed. The truth is reasonably well known now thanks to the benefit of the web so any chance of a recovery are very remote at least without a complete change. We are running out of idiots to fleece I’m afraid.

  • Spirit of Odd Job Bob says:

    Grrrr!!!!

    These types of calculations make me SOOOOO mad!

    Firstly, as has been pointed out by others below, Andreas is NOT going to pay off his €60,000 a year interest with the money he makes from the sales. I mean, how else will he keep his children in private schools, his new Mercedes, the holidays abroad, meals out and his family in the style to which he believes he’s accustomed (to show off to the neighbours that he’s still a big cheese). As well as keeping his mistress in Limassol in the finest caviar and champers… Especially in years 2 and 3 when he aint sellin’.

    Secondly, the moment he steps into his bank to extend the loan, they will whack on penal interest rates (at the 10 – 14% Andrew states below. I’ve done my calculations based on 13%, just to be nice. For a change).

    Thirdly, all figures he gave to the bank for property sales were ESTIMATES. When he presents his bank with an actual Contract of Sale, he now has a new Sale Price (which may be higher than the estimate). The bank will be falling over itself to lend him more money based on the revised (fictitious) Portfolio Value. This further mortgage he gleefully takes out (as he’s no intention of paying anything off anyway). Oh, he may even help the buyer to get a mortgage FROM THE VERY SAME BANK to buy the property in the first place! There’s leveraging and there’s SUPER-SIZED leveraging…

    Fourthly, every time he sells anything, he has VAT to pay (which he won’t). Every day he doesn’t transfer the properties into the name of the buyers, he has IPT to pay (which he won’t). This all adds up (and interest is charge on it as well).

    And since all is in the name of his limited company anyway, he knows that if he walks away from it all, there is NO personal liability for anything, his money is tucked away nicely offshore and all the banks will do is go after the buyer who will be asked to pay the developers’ capital of the loan, missed interest payments, IPT, CGT plus any other memos attached to the property.

    So, in the above rather optimistic 7-year example (cos he’s really going to sell 100% of his development, in the current climate?) and assuming that good boy Andreas makes the first interest payment, gets charged 13% Penal Interest Rate from year 2, DOESN’T increase his borrowings nor assist anyone to get a loan to purchase any of his flats (which we know he will) and is NOT charged interest on any CGT and IPT that he hasn’t paid, we have (using my calculations, all available on request):

    Year 1: Flats Sold: 1; Loan Outstanding (Beg. Of Year): €1m; Interest Rate: 6%, Interest: €60k; Capital Redeemed: €60k; Loan Outstanding (End Of Year): €1m; CGT Due: €18,914; IPT Due (approx as the Land Registry regression formula is a mystery to virtually all): €3580.75, Total Debt Against Portfolio: €1,022,494.75, Developer’s Bank Account: €120,000.

    Year 4: Flats Sold (in year): 3; Loan Outstanding (Beg. Of Year): €1,197,800; Interest Rate: 13%, Interest: €175,956.82; Capital Redeemed: €0k; Loan Outstanding (End Of Year): €1,353,514; CGT Due (cum): €73,828; IPT Due (cum.): €14,323.01, Total Debt Against Portfolio: €1,441,665.01, Developer’s Bank Account: €480,000.

    Year 7: Flats Sold (in year): 2; Loan Outstanding (BOY): €1,728,302.03; Interest Rate: 13%, Interest: €224,679.26; Capital Redeemed: €0k; Loan Outstanding (EOY): €1,952,981.29; CGT Due (cum): €166,570; IPT Due (cum.): €25,065.26, Total Debt Against Portfolio: €2,144,616.55, Developer’s Bank Account: €1,200,000.

    The last figure is interesting cos this formed part of the billions that escaped last March before the axe fell.

    So, who picks up the tab for the enrichment of the developer and the saving of the Cyprus banks? You, me and the EU!! And so it goes on…

  • demetri says:

    It maybe too little too late, but Mr. Hourican of the BoCY will change things…hopefully for the better, let’s just say I have first hand info of what is going on and corporate banking division will be spilt in 3, one for existing corporate clients (including developers) a new dept for loan restructuring and a new recoveries dept….

    Its be going on too long, borrow from bank don’t bother to keep up payments and get off scot free whilst raking in your won profits….all of this on the back of us minnows.

  • Steve says:

    Mr Loizou has omitted to mention a couple of important points. Depositors funds are guaranteed by the Government of Cyprus and by the EU, so no depositors should lose their money. The problem comes when these guarantees are called on. The people who will have to pay the guarantees (because no one else in the EU has the money) are the Germans and they are nervous about the way that open-ended assurances have been given that apply to all depositors, for example the Russian depositors of funds in Cyprus banks. The German courts are warning that paying the lions share of these bailouts, because that’s what they are, could be against the constitution of The Federal Republic of Germany, in which case the failure of the Euro and possible break up of the EU will follow, should the legal arguments have to be tested sometime.

    These current and potential crises have been brought about by the politicians’ blind commitment to further integration of the countries of Europe and the need for a common currency to accelerate that process. The South European countries with their flimsy economies have never adequately matched up to the requirements set for entry into the Euro, yet they have joined and exploited the benefits to the full and only started to worry when the consequences of their profligate behaviour became clearly apparent. So it is with Cyprus. The banking fiasco on this tiny island with less than one million inhabitants could bring down the European Union unless the banks are properly recapitalised, which is where developers and title deeds come in. Signs are there that the EU is determined, if it should come to that, that the innocent buyers of Cyprus properties rather than the Germans will be doing the bailing out.

  • Janner says:

    The banks aren’t even being greedy yet. They haven’t chased the debt because they don’t have to. The EU pays for the mistakes. What a result….. But when they do come knocking for your assets make sure you defend the action in Cyprus. Imagine the banks and the courts trying to cope with processing 130,000 actions.

  • Peter Davis says:

    So Andreas borrowed €1,000,000 from the bank and made €1,260,000 from sales.

    If all the money went back to the bank, and not into family villas and Mercedes, the bank has a profit of €260,000. Not bad for 3 years, over a quarter of its stake back in profit.

    So why not call it enough and write off the debt?

    At some stage the banks have to get real and realise they are not part of the problem, they are the problem.

    Of course Andreas will just walk away from the debt anyway. So how greedy are Cyprus banks?

  • M Hannah says:

    Janner why do you mince your words ,you are right “We are all of us in the ****) I`m afraid we are all done for and have really been done over, cant see any blue skies ahead, only VERY DARK CLOUDS!!!

  • Costas Apacket says:

    I suppose you could say that buying property in Cyprus is like a box of chocolates, because you definitely never know what you’re gonna get!

  • Janner says:

    But the best bit in all of this is that the EU continues to prop up the banks even though they are broke with the NPL debt. Lets face it, they will only ever be able to recover a fraction.

    What a fantastic politically legalised fraud!!

    At least the troika have finally shown their hand and we all know where we stand……which is in a big pile of ****

  • Andrew says:

    That hypothesis is only relevant if Andreas has been reasonably prudent. In Reality Andreas, Costas and his mates have paid back nothing for more years than you could shake a big stick at.

    Use that same formula but insert 10 – 14% interest and Andreas pays the bank back Zero so far. Extend the avoidance to, say 8 years and you will have a better idea of the problem that the banks have allowed to fester.

  • elaine says:

    The banks should drop the loan interest rates and stop the interest accruing on loans that are non performing, instead they are sitting on them and doing nothing, and will not help when asked.

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