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Investment opportunities in Cyprus

In a question and answer session Dr George Mountis of Emergo Wealth discusses the opportunities for institutional investors who may be considering investing in the Cyprus real estate market.

investment opportunitiesWhat kind of institutional investors are likely to invest in Cyprus?

The type of investors that demonstrated interest to invest in big real estate projects, in which Emergo Wealth has acted for both the buy and sell side of the investment, includes mainly foreign High Net Worth Individuals (HNWI) and institutional investors (i.e. private equity firms, financial/investment companies and hedge funds).

For commercial and mixed use real estate projects (depending on the size of the investment), the interest is primarily from foreign investors. Some local investors are seemingly willing to invest but mainly in ‘distressed assets’ with significant market value discount.

For residential real estate properties, in the Q1 2014, almost 30% of the sale and purchase agreements involved foreign buyers (mainly from Eastern Europe, Middle, Far East and the UK). There has been an increase of interest from local buyers but again such investors are always looking to invest in ‘distressed assets’.

Local sources of funding investments are limited as there has been a significant flight of private capital and the domestic institutional investors (pension and provident funds) are already over-invested in local real estate properties.

Earlier this quarter, the government has announced changes to the criteria by which the citizenship is granted to investors. The amount necessary for foreign investors to secure a Cypriot passport is reduced to €2.5 million for someone participating in a collective investment worth at least €12.5 million. This program has proven to be effective and we believe that the new criteria will be welcomed by investors from the Eastern Europe and the Far East (China).

How realistic is it to expect investments from institutional investors in the above fields?

It is realistic. In the next few months, we do expect that some more deals will be announced mainly concerning hotel/tourism real estate investments. As Emergo Wealth, we believe that Cyprus has started regaining the international investment community confidence vote, as we have seen an increase in interest from institutional investors.

We represent numerous foreign investors that have already arrived in Cyprus. Together, we review specific assets and projects, looking at opportunities to invest in anything from large-scale real estate projects (mainly in the tourism/hotel industry), to operating hotels and/or acquiring non-performing loans/assets, etc.

As previously mentioned, these sophisticated investors have seen this scenario play-out elsewhere (Spain, Ireland, Germany) and they know that in two or three years the economy will start growing again, provided that the country streamlines its public sector, strengthens its supervisory bodies, and restructures its banking industry.

What do institutional investors want to see? What will they take into consideration when making investment decisions?

Obviously, these investors are here (or want to come) to make money, some short-term and some long-term. They are interested in investments that are at a discount in terms of market value and they are also keen to acquire assets that have some form of an ‘exit’ strategy in place. The problem in Cyprus, is that due to the limited demand and liquidity (especially during the last few years), investors are particularly worried as to how they could possibly exit from specific investments, i.e. dispose assets in the near future. Today, it is very easy to get in (acquire), but tough to get out (sell).

Furthermore, foreign investors are increasingly cautious when it comes to actual asset due diligence, thus, thoroughly investigating both the underlying financial and legal aspects of a transaction (i.e. the title deeds and charges on the estate has been one of their major priorities).

We recommended that all investors take into consideration the actions outlined below:

  1. Formulate a specified strategy and define assessment criteria.
  2. Review of individual projects/assets against the predefined strategy.
  3. In-depth examination of projects that meet return and risk profile (reviewing risks and exit strategy).
  4. In-depth due diligence.

What kind of returns are the foreign institutional investors are expecting from investing in real estate projects in countries like Cyprus?

In Cyprus, investment yields is a term not frequently used. It is widely acknowledged, that yields are a useful analysis tool demonstrating the relationship between rent and property prices.

At the end of Q4 2013 (RICS, 2014), average gross yields stood at 3.8% for apartments, 1.9% for houses, 5.3% for retail, 4.5% for warehouses, and 4.3% for offices. The parallel reduction in capital values and rents is keeping investment yields relatively stable and at very low levels (compared to yields overseas). This suggests that there is still room for re-pricing of capital values to take place, especially in the commercial real estate.

What is your advice (bullet points) to project owners in Cyprus such as Real Estate Developers, Hotel Owners, and other Entrepreneurs? What do they need to do to be considered eligible and to have a reasonable chance at least to be considered by institutional investors?

  1. Rational pricing – adjust asset prices to reflect market conditions.
  2. Those who have a mortgage on their assets need to review asset pricing with their bankers to ensure the lowest pricing that the banks might be willing to accept in order to release the mortgaged assets. Companies are urged to do so before entering negotiations with institutional investors.
  3. Obtain professional advice to prepare investment presentations and highlighting project attractiveness (i.e. ROI, unique selling points that could provide the edge needed to make an asset stand out from the crowd).
  4. Evaluate the local market with comparable project characteristics and values (forget about 2012 pricing, institutional investors are not interested in purchasing assets at historic top-of-the market valuations).
  5. Coordinate the preparation of disclosures and other required documentation (i.e. title deeds, building permits for any work done, etc.).
  6. Perform roadshows to major investment destinations (again professional advice might be needed).
  7. Create bundles or portfolios of properties that can be collectively sold to investors (Government incentives are provided for such collective schemes).

Readers' comments

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  • Sheri Bowditch says:

    Now that we are deep in this mess, CHF mortgage, no Deeds, lying cheating lawyers, bankrupt developer, ….. What can I do ? No advice whatsoever from anyone. We are having to spend thousands in order to comply with EU regs in order to obtain Buildings Certificate. We have to employ a Lifeguard, who has had to have every medical check known to man. I have NEVER seen one lifeguard anywhere in Cyprus. We are now being told that Peyia Municipality will take legal action if we don’t get a move on!!!! We bought in good faith have paid in good faith, property worthless and illegal …….. Any advice anybody ? Desperate desperate.

  • Stuart says:

    @Michael H.

    Some of the many stories you refer to are actually on record insofar as she was jailed in 2008 for persistent disqualified driving and some years later fined by the Cyprus Bar Association for falsifying legal documents. Ah, but this is Cyprus isn’t it!

  • Michael H says:

    I did instruct my lawyer in Pafos to carry out “in-depth due diligence” only to find out later that she was in bed (literally) with the property developer and that the property was mortgaged to the Alpha Bank.

    I’ve heard many stories about this lawyer yet she is still practising.

    What hope is there for anyone dealing with these crooks?

  • Stuart says:

    Everyone agrees with Jim because we all know the reality of the situation is nothing like this article purports to describe. The Cyprus property market is indeed, to all intents and purposes, dead and buried and unlikely to be resurrected for a very long time.

    The Author was saying the exact same thing in several previous articles over recent years, all of which were met with a healthy dose of scepticism by readers of these columns. So the question remains, has anything changed?

  • martyn says:

    I agree with Jim, my advice is DON’T buy anything in Cyprus, if you must buy WITH deeds otherwise you will be scammed with IPT at a much inflated rate.

    I bought in 2005 and only now my deeds are ready for me to be scammed again by the Cypriot government, builders and lawyers.

    Why do I carry on you say when I know its a scam? Well I purchased at 120,000 Cypriot pounds and now its worth 50-70,000 euros. I cannot wait to sell and get what ever little I can get, worst thing I ever did.

  • M Hannah says:

    Jim I share your view entirely, The Cyprus Government is not listening to anything that anybody has to say.

    Until They do ,and Make the Title Deeds issue the No 1 Priority, No one will buy here, if one cannot sell ones Property easily, then why should anybody even contemplate coming to Cyprus, We have all been cheated and lied to by Solicitors, Developers and the Banks till they stop their corrupt ways here, this country has had it I’m afraid. Pity is it not, such a lovely place to live.

  • MartynG says:

    All good, detailed, solid stuff but I note particularly one major ‘provision’:

    ” (sophisticated investors have seen this scenario play-out elsewhere (Spain, Ireland, Germany) and they know that in two or three years the economy will start growing again,…..)”

    …..”provided that the country streamlines its public sector, strengthens its supervisory bodies, and restructures its banking industry.”

    Interesting that Spain, Ireland and Germany are quoted, in terms of ‘recovery’ – but Greece is notably omitted.

    Yet, Cyprus seems in many cultural and loose fiscal and financial, governmental even, aspects to be closer to Greece – and certainly seems to lack the Northern European rigour that Characterise Germany and Ireland.

    Thus, It’s going to require a Massive cultural and attitudinal shift for RoC to get out of the labyrinth of deep-seated problems it is currently grappling to come to terms with, let alone deal with!

    Seems to me 5-7 years let’s say by 2020, might be a more realistic time frame in which to completely tackle and remedy these very ingrained problems before the country can overhaul and re-invigorate it’s economy, improve its long-term future prospects.

    As mentioned in previous threads, Cypriots tend to believe ‘something will turn up to get us out of a hole’ and maybe, just maybe!, sound short, medium and longer-term strategies that enable the tiny nation to seriously capitalise on MedGas/oil to reinvent itself will form a key part of rebuilding the nation’s financial and economic performance.

    But it does need much greater clarity, management and application than we have seen so far, if a promising new ‘2020 Vision’ is to realised.

  • Jim says:

    Another attempt to talk up the Cyprus property market.

    In my opinion, the Cypriot property market is virtually dead & buried.

    The only factor that may change this situation is, the provision of a clean title deed at point of sale. Until the government change the system to make this happen,nobody in their right mind will invest their money in property.

    Just for the information of the few that are still contemplating buying a property that has no individual title deed, you have a good chance of losing everything you invested, as you may be liable for developers debts to banks & various government tax authorities.

    Having made such a mistake, you will have little chance of selling such a property at any price.

    The safest way to purchase property in Cyprus, is to buy a property that has been issued with its individual clean title deed. This usually a resale.

    Do not get taken in by statements such as title deeds guaranteed, or title deeds pending.

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