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Cash-rich banks stockpiling real estate

Cash-rich banks are stockpiling properties as they turn to buy real estate linked to mortgages of defaulted borrowers as banking institutions dominate the property market.

Cash-rich Cyprus banks stockpiling real estate AFTER acquiring real estate through debt to asset swaps with defaulted borrowers, banks are now turning to properties linked to non-performing loans, which they failed to foreclose through auction.

According to Central Bank data, banks bought 30% of properties they attempted to foreclose through auctions in 2019.

In 2018, Cyprus banks only bought 9% of properties they brought under the hammer. The data was sent by the Central Bank to parliament, which was then leaked to the press.

It shows that banks have bought one-tenth of all properties for which the owners were informed that their property was to be sold at auction under the foreclosure law.

Out of the 10,590 properties auctioned, 949 properties were acquired by mortgage lenders after the first auction failed.

The proportion of foreclosed properties that end up with the banks has increased significantly, as banks see their efforts to foreclose properties at auctions fail.

Banks have increased their success rate in selling off foreclosed properties, reaching 10.8% up until September 2019, but this is offset by the fact that fewer foreclosure notifications were sent out.

In the first nine months of 2019, 213 foreclosures were completed. Cyprus banks had sent out a total of 1,971 notices for properties to be foreclosed.

In 2018 the rate stood at a lower 5% with 203 properties foreclosed out of 4,038 notices sent out while in 2017 just 121 out of 2,625 properties were foreclosed (4.6%).

Furthermore, since 2015 a total of 10,590 notices have been sent out while banks have foreclosed just 557 of them, a success rate of 5.3%.

Bankers argue it’s an indication of the limited profitability of the divestiture framework, as banks appear to move into real estate purchases to close non-performing loans for which no other solution has been reached.

But on the other hand, it is also an indication that things are moving in a different direction than previous years.

As confirmed by financial sources, Cyprus banks have real estate portfolios comprising properties acquired through debt to asset swaps and auctions, worth over €2 bln.

“Properties being bought are then added to the bank’s property portfolio with dozens being sold online,” a banking source said.

Talking to the Financial Mirror, a banking source said that banks are making use of the option provided by the law, allowing them to buy the properties for which they initiated foreclosure procedures as a tool for reducing their NPLs.

“Being allowed to buy the property is one of the tools offered by the legal framework to mortgage lenders which is used as a last resort when a non-serviced mortgage loan receives no offers at auction.

These loans need to be removed from the banking system one way or another.”

Balance sheet

Buying the asset backing an NPL, allows the bank to remove the loan from its balance sheets, which means that banks will logistically rid themselves of NPLs, allowing them to make less provisions in the future.

This is not a choice favoured by banks, as they do not want to be burdened with acting as a real estate agent.

“Currently, having large property portfolios is already pushing banks’ operational costs upwards as they need to set up departments to handle the assets acquired,” said the source.

“Some are to be sold, while others will remain in the care of the bank until the properties are ready to be put back on the market.”

With banks extremely reluctant not to flood the market, real estate agents see this will result in banks having a large number of properties that they will need to maintain.

Panos Danos CEO of Danos / BNPRE Group told the Financial Mirror that banking institutions are turning to real estate consultants for help with managing their property portfolios.

“Whether they wanted to, or not, Cyprus banks have become real estate agents. They currently need an army of people to handle their portfolios, which also include old buildings which will need maintenance, and in some cases a good makeover,” said Danos.

The real estate consultant confirmed that banks are being careful not to overload the market which would send property prices down.

Danos noted that one of the difficulties banks will have while trying to sell property accumulated, is that Cyprus is a small market.

He does not expect to see interest from Real Estate Investment Trusts or funds investing in properties.

A financial analyst closely following developments told the Financial Mirror that banks will have difficulties in offloading properties worth some €2 billion, as they mainly consist of plots of land (50%) and commercial properties (30%).

“These properties are currently not in demand. The market is looking for small flats and houses at the moment.”

The analyst also argued that banks are not buying their way into the property market but are rather buying properties as part of their strategy to reduce their toxic loans.

He explained that banks prefer to buy the asset, thus writing off the NPL for which it was used as collateral, without allowing borrowers further time to resort to courts which will only bring about further delays, in some cases years.

“However, that is not the be-all of their strategy. The goal here is to send strategic defaulters a message that the banking system will no longer tolerate strategic defaulters.

It should be perceived as a clear sign that banks are now moving onto a different stage of their strategy on clamping down on NPLs.”

Regarding the auction process itself, by law, the initial attempt to sell a mortgaged property is carried out by the auctioneer only with a reserved selling price of no less than 80% of its market value.

If the auction does not result in the sale of the property, the bank can proceed with further efforts to sell the mortgage.

For three months from the completion of the first auction, the bank can still sell the property at 80% of its value.

After three months, the reserve value goes down to 50% of the market value when it goes back for auction.

Under the foreclosure legislation, if the lender fails to sell the mortgaged property within six months from the completion of the first auction, then the bank has the option to buy the property at its market value based on the last valuation made.

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  • Steve says:

    Dear Ed: The area of which I speak is Polis – Prodromi – Latchi – Neo Chorio. The properties within 100m of the beach have gone mad, with big value increases every year. Further away, the prices have stagnated and even fallen over the past 5 years. The buildings are mostly of reasonably good quality and many are permanently occupied and advertised on that basis.

    My apartment was valued by two estate agents and an RICS surveyor, so there is no mistake; 52% of 2004 value.

    Ed: I’m sorry to hear that Steve.

  • Los Faith In Justice says:

    All of this is happening with the approval of the European Central Bank and the Central Bank of Cyprus (supervisory bodies).

    Of course many of the “holiday homes” were sold as investment properties for short term holiday lets – when it was illegal to rent them out by the Banks. These were unlawful loans. So yes, they were misrepresented and unlawfully funded. Since the title deeds were never going to be available in “3-5 years” as foreign buyers were told by their solicitors, their banks and their developers (and are still not available now a decade + on), many of these properties cannot simply be sold on as “the sting” (institutionalised fraud) is now widely known and understood, but conveniently ignored in Cyprus.

    The Banks can “buy” properties at a significant loss at auction, go to the court and claim the losses from the hapless buyers (including laying claim to world-wide property) and / or the developers (who provided supporting guarantees). The Bank’s statements of claim submitted to the court request that the properties can be sold to “anyone” at “any price”, which in reality means they can be sold to connected persons at the bank for tuppence with the judge’s blessing. Then there are tax benefits from registering losses and the government has decreed that the Banks don’t have to pay transfer fees (like the rest of the population, which is discriminatory). Then when they come to sell the properties, exempt from transfer fees, they can declare profits in subsequent years but not pay any taxes on the same). They’ve set up lots of subsidiary companies where they are hiding assets / liabilities. Their expensive lawyers and accountants are very clever. The Banks are profiting from their dishonesty, and the laws in Cyprus have been changed to accomodate them and the European Bank has authorised all of this, in the name of “financial stability”.

    Anyone who bought deedless property with a loan from a Cypriot Bank would have signed an assignment agreement (which you probably didn’t see (if it was signed under POA) and/ or didn’t understand) which effectively gave all your rights to the Bank, leaving you only with obligations. You were stitched up from the moment the document was signed and it could only ever end badly (for the buyer).

    Before 2017 the Banks weren’t allowed to hold property long term which is why they couldn’t reposses (along with other unfavourable laws, now they are allowed to be landlords and estate agents and the laws have been changed so they can speed up foreclosure (regardless of how unfair or opaque the terms and conditions were or whether it was a loan for an unlawful purpose i.e. funding a property for short term holiday letting of less than 30 days when it is unlawful to let out such a property for short term holiday letting (and therefore ultra vires).

  • Steve says:

    Considering the rock-bottom reputations of Cyprus banks regarding property, I can understand the suspicion with which these transaction are regarded by some. The article doesn’t actually praise or criticise, it is fairly neutral. The fact is that what the banks are doing is replacing outstanding loans, which have a negative connotation on the balance sheet, by assets that they do not need to make provisions for under accounting rules.

    This can be seen as doing property owners a favour. If these properties were sold without reserve at auction, there are so many that the market would collapse and every owner who wanted to sell would lose out. However, the procedure calls for the asset to be re-auctioned later with a reserve of 50% of the valuation. The trick in all this appears to be the valuation. The banks want to replace the loan with an asset of greater or equal value, otherwise they will have to make cash provisions for the losses. We see no details of the valuations methodology, but I suspect they are not less than the outstanding loan and that is why many will not sell, because most Cyprus residential properties are only worth ~50% of 2004 values.

    The idea that estate agents can assist, may not provide a solution. The banks don’t want to be property companies and don’t want to rent out their properties, they want to sell them at a value equal to or greater than the outstanding loan amount. Adding estate agents commission to the price doesn’t help.

    Ed: In general, residential properties held their value. It’s the holiday homes, many of which were poorly built, whose prices are below 2004 values.

  • Costas Apacket says:

    Hold on, I know this is Cyproos, but did I read this right?

    Customer are not repaying the loans, for which they used Land & Property as collateral, and now the Banks are buying what they already own?

    I realise that Cyprus is the Arabian branch of the EU, but even so, buying what you already own is nonsensical isn’t it?

    Ed: This is all about accounting. By buying the properties they are reducing their cash as the properties they purchase will be shown on the books as assets.

  • Richard says:

    It just beggars belief how some can look upon this practice as somehow ‘prudent’ or ‘sensible’ practice by the banks.

    Let’s just remind ourselves that some banks committed DECEPTION and FRAUD with these original loans – which is WHY they turned into NPLs. Sure, some borrowers withheld payment from the outset, but let’s be really clear.

    This was a carefully orchestrated manoeuvre by banks to get people’s savings out of their home countries and into the Cypriot control. It was immoral, unethical and downright CORRUPT.

    Be interested to know who the main shareholders are in some banks. Other rich bankers and investment brokers – no doubt?

  • Suheil Telegraph says:

    Yes banks are becoming real estates owners. This is only solution to liquify dead loans. They don’t have to employ personnel to handle the transactions; each bank can use services from real estate agents through contracts, who will be more than happy to supply in return for a certain commission. While these same agents can stabilise the prices of properties.

    Banks can also lease some properties to get income rather than sell them.

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