Latest Headlines

The unloved nature of foreclosed assets

At the end of Cyprus’ ‘Minsky Moment’ banks will end up being the owners or economic owners of a sway of foreclosed assets ranging from individual plots of land to sizeable commercial assets.

The unloved nature of foreclosed assetsTO MAKE a frappe you need water, coffee, a shaker, ice cubes, a tall glass and a straw. The total cost of these items is about €0.30, and its retail price about €2.00 – €3.00. If you leave the frappe sitting in the sun for an hour, then the ice cubes will melt, the foam will go down and the coffee will taste bitter. Its retail price now will be almost nil.

A building is much like a frappe. Its value, if the developer has done his job right, is more than the aggregate cost of its components. Leaving market forces aside, if the building is left unattended or is undermanaged, then it will progressively deteriorate, both physically and economically. The lack of maintenance will create increasingly higher repair and operational costs, which combined with limited contact with tenants, both current or prospective, will result in a built-up in grievances and to lease terminations.

A ‘Minsky Moment’ is a sudden collapse of asset values, where such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. High debt levels and a decrease in demand, leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to sustain the debt they took on to acquire them, with losses on such assets prompting lenders to call in their loans. As investors and banks look to exit their respective positions, no counterparty can be found to bid at the high asking prices previously quoted. This progressively leads to a precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity and a severe demand for cash. Exiting at this point can only be done if one is willing to incur the maximum level of losses.

At the end of Cyprus’ ‘Minsky Moment’ banks will end up being the owners or economic owners of a sway of assets ranging from individual plots of land to sizeable commercial assets. Commercial assets with an operational component, such as hotels, malls, multi-tenanted buildings, etc., pose particular challenges as they require hands-on asset management or else their value will deteriorate further. Assets also have various holding costs running in the background, e.g. maintenance, insurance, property taxes, as well as physical deterioration due to natural wear and tear and vandalism. For operational assets the need to act is even more pronounced as any significant or prolonged disturbance in the operation/business side, is likely to have a heightened impact on the asset’s value, for example if tour operators fear that a leisure property may close down they could terminate their contracts or divert tourists elsewhere.

In order to add value and improve liquidity, the asset manager needs to employ an “Owner Mentality” in order to tackle the gamut of issues that relate to each asset. This requires first-hand knowledge of the real estate itself, a principle often forgotten in more “transaction-based” environments. Banks need to employ this “Owner Mentality” in order to appreciate the range of factors that affect their real estate assets and maximize value by resolving problems and taking value-add steps before putting assets on the market. This will help them reduce their losses, maximize liquidity, and structure their disposal strategy in a more capital efficient manner.

Pavlos Loizou
Partner (Greece & Cyprus)
Resolute Asset Management

Readers' comments

Comments on this article are no longer being accepted.

  • Mike says:

    @ Phil, Take it easy re I’m not the same Mike. And by respected I mean Antonis Loizou. Is he not respected enough for you?

    Also I never tried to win an argument. I only tried to show that even properties with full titles are hard to sell at 60% plus discounts. What is your problem with that?

  • Phil says:

    @Mike January 6, 2015 at 10:58 am

    Is this the same Mike January 2, 2015 at 10:22 am ?

    If it is you,you now have me very confused on two accounts:

    Firstly: I assume your selling price 70% discounted is based on your believes and don’t wish to rob anyone.

    Secondly: Plus the fact that you use the word RESPECTED surveyors er more than one. The hell, where did you even find one let alone two? You will win no argument if you use words like RESPECTED.

    If its not the same Mike good luck but please don’t use words like that it gives us all migraine.

    Phil

  • Mike says:

    My 2 properties are being marketed at 70% less than the 2007 valuations done by 2 respected surveyors.

  • Scruffy says:

    @Phil

    I agree with your comments. I often hear and read comments from so called prospective buyers complaining of overpricing. God only knows where they are looking. I know of a couple that went for half that was paid and there is one for sale now next to me that will lose the owner more than half but still cannot get a buyer.

    IMHO, It goes back to the greed culture. It was the greedy that collapsed the market and now the greedy are sitting in the wings eyeing up the victims.

    Their attempt to conceal their greed by claiming that the houses were overpriced in 2006/7 is nonsense.

    I bought my 2 bed Bungalow in Cyprus in 2006 for less than the cost of an average two bed flat in the UK at that time.

    Prospective buyers? Opportunists more like.

  • Phil says:

    @ Mike

    Part of your assumption I agree with but you have missed one vital part “I feel for those wanting to recover as much of their debt or spend as possible but the market will dictate the price”. Yes but that was not the thinking of Land Registry when they went out (some did) en-mass cowboys at heart to valuate property in the full knowledge that higher the price then more taxes have to be paid on both the tax on sale and IPT.

    Why do you quote the 50’s, 60’s, 70’s, 80’s and 90’s is beyond belief.

    If and I very much doubt that you are seeking to purchase property in CY there are loads of property around where the seller would dearly love to off-load even at a knock-down price just to be rid off and get out of the claws of this government/developers/lawyers and leave that part of their lives to the trash can.

    You say “There are people wanting to buy (assuming title is issued) but only at a realistic price” where are they then, bring them on as I have not found one yet only those that want it so cheap (Vultures) so to back up your statement where are they? You can get me via this page I will be most interested and more than happy to eat my words.

    Yes I have a property for sale with FULL CLEAN TITLE DEEDS and NO its not 4, 6 & 10 times higher than what it cost me, nor did I pay 4, 6 & 10 times higher than the market at the time and it was New.

    I am waiting with bated breath

    Phil

  • Sue says:

    This is the 5th year I have tried to sell my 3 bed apartment.

    I have knocked seventy thousand off the price, still no takers, now we here in the UK the euro has dropped against the sterling pound, I am beginning to hate Cyprus.

  • Janner says:

    The bottom line is we have a state endorsed snouts in trough, cake and eat it fraud! Everyone knows that. The plan is for those in the scam to rip as much dosh as possible from everyone’s pockets bar their own and skip off into the sunset laughing! Those with vested interests can dress it up all they like. The system is not an accident, they are not stupid, in fact, what they have achieved is quite clever. The government allow this mess to continue and the only possible reason why they do is because……..you’ve guessed it folks…..they’re in on the scam as well. As long as European taxpayers continue to foot the bill they will continue to line their own pockets. Stop the free money and you will force them to change their system and if they don’t they’ll go bust!

    Simples.

  • Richard says:

    This article can added to the pile of similar ones over the years.

    The 100 ton elephant in the room is DEVELOPER NPL. €3bn+ unpaid, uncollected and being serviced by interest-only payments or not at all. Anyone remember the €0.5bn defaulter who has been paying interest only since 2006 and managed to borrow a shed load more for developing a marina complex at Limassol despite having not serviced their debt properly for years?

    This is a tiny elite of people who owe multiple times more money than individual overseas investors or retirees to the island.

    Why there is even time wasted discussing anything else regarding NPL’s until a big chunk of that is cleared up is frankly beyond me.

    Everything else weighed against that issue – is piffle.

    Cyprus does not belong in the E.U with such a mentality. The only reason it is must be due to other reasons (like it’s strategic position for defence-related matters).

  • Mike says:

    On the other hand the properties could be sold but at a price which some of us have been advocating is more in line with realism rather than the fantasy of cosmic proportions which has resulted in the telephone number prices people have been convinced their property is ‘worth’.

    This is Cyprus not Moscow, Hong Kong, London, Shanghai, Sydney, Paris, Singapore or New York. There are people wanting to buy (assuming title is issued) but only at a realistic price. Sadly those who paid 4,6 & 10 times what the end product is worth will suffer the loss or remain with the debt. Such has been the allure of Sun, Sea, cheap property and laid back lifestyle but the chicken has well and truly now come home to roost. This is a reality check and we either grasp it or hang on in a vain forlorn hope believing things will return to what they were. The problem is those of us who remember how things were (in the 50’s, 60’s, 70’s, 80’s and 90’s) know what we are prepared to pay and no more.

    I feel for those wanting to recover as much of their debt or spend as possible but the market will dictate the price.

  • Steve R says:

    Delicate negotiations are required on an individual basis. It will take years. I am glad I am not a bank shareholder

  • Steve R says:

    I think the banks are playing a dangerous game here. On the one hand if they start to reclaim a few properties will this scare people into starting to pay their NPLs.

    If this doesn’t work then as described in the article the banks will be left with a portfolio of properties for which they have nothing in place to stop them rotting away.

    Down to you at the banks now

  • The views expressed in readers' comments are not necessarily shared by the Cyprus Property News.

SELECTED REPORTS

Back to top