FORECASTING the degree to which the sale of Non-Performing Loans (NPLs) will affect the real estate sector is not an easy task.
The debate originates from the decision of the Bank of Cyprus to sell 14,024 NPLs to investment funds managed by the international company, Apollo Global Management LLC.
The borrowers of the NPLs in the transaction owe around €5.7 billion. The Bank of Cyprus in its books, after provisions, showed them at €1.5 billion.
The Bank of Cyprus will get €1.4 billion cash from the transaction, leaving it at a loss of €135 million.
It is evident that the amounts of money involved are quite substantial, both for the Cyprus banking sector loans as well as the NPLs and the real estate sector.
These loans are secured by mortgages on 9,065 properties, which is equal to the number of property sales in Cyprus for a whole year.
It is easy to understand that if all these properties are placed for sale in the real estate market simultaneously, at low prices, they will create a huge downward force on prices.
Is the above to be expected? Can it materialise?
We believe that these thousands of properties will not end up in the market at the same time and at low prices.
What will happen will depend on the plans and intentions of the fund management company.
How will this procedure actually evolve?
Initially, borrowers will be approached to reach a friendly settlement, with the possibility of a substantial loan reduction for immediate or scheduled loan payment.
If not successful, the fund management company might proceed with a sale through auction.
It is believed that past delays in the auctions procedures will be a thing of the past since legislative amendments have been made recently.
The first auction minimum price will continue to be based on the 80% of the market value, as established by two valuations.
It is interesting to analyse the nature and type of the 9,065 properties which might go under the hammer.
The next question that begs for an answer is if there is the buying power to generate the sale of these properties. The answer is most likely not.
Even though there is a lack of official data, we believe that the vast majority of these properties (over 80%) are unattractive properties which will be nearly impossible to sell at market prices.
In view of all the above negative factors, we expect the Fund managers to place the biggest emphasis on reaching friendly settlements. If not possible, they will be probably forced to exchange loan to property.
While any prediction is risky, we expect these funds to place the properties in the market in stages, thus limiting the pressure on the market and avoiding a sharp drop in property values.