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Non Performing Loans and Ability to Handle
10 December 2017
The subject of Non Performing Loans (N.P.L.s) is hugely serious and according to Averof Neophytou (Chairman of the governing party) it is the biggest problem we have in Cyprus after the political one.
We are of the opinion that whatever idea one has to help solve this situation, our first care must be the support of the banks, so that we do not have to face the situation of the Bail In of the year 2013. Since we are involved to an extent with N.P.Ls, we wonder how we can help with the target to reduce to an extent this problem. We watch the various efforts that the Bank of Cyprus is undertaking (for the other banks they are at an infancy stage) regarding the swap deals, the recent creation of a real estate fund with a return of 6%, the creation of its real estate management team (REMU) etc. Notwithstanding that banks exchange their debts with real estate valued at 70% of the market value, when it comes to sell their loans in bulk to foreign investors, the latter, are rather apprehensive offering a price more likely around 50% (see last effort with a discounted asking price of €400 mil. value with a €300 mil. offer).
The Cyprus real estate market is so small that does not provide some sort of confidence to large foreign investors, be it that the economy is recovering, the deposit interest rates are at a reduced level, tourism is on the up etc). We also note other than the Bank of Cyprus has some success and the recent appointment of specialized foreign firms, by other banks, is at early days to ascertain their capabilities. So far we noted that these new administrators have their own shortcoming because they use bank employees to handle real estate matters. It is not the best and we note delays in responding and even when there is some interest, they are not in a hurry to respond (e.g. no replies, normal bank working hours, no weekends/late afternoons etc). In a recent case a financier took his time to reply for 4 enquiries regarding apartment sales (1 month) and in another it took our Office to make 12 phone calls and one month delay to chase the employee to respond (always in meetings, sick, leave etc).
So the financiers themselves have their own limitations and capability to blame. They need to get their act together, have special promotional teams set up which will go out there locally and abroad to promote their assets, give finance to worthy buyers for acquisitions, keep nagging the local international audit firms, advocates etc, who are handling foreign investors, reminding the market of any opportunities and including participation in exhibitions, real estate/tourism, exhibitions, conferences etc.
There are of course certain projects that one cannot dispose off especially those which are presently half built, with the only option left is the completion and sell it afterwards. Difficult to persuade the financiers to do it for this alternative approach since they are afraid that throwing good money after bad in not a good option, but then, if they do not sell what can you do? Completing a project with no demand and having acquiring it at a discount price could be one option. Project management could be another alternative to offer and as an example there is a 40 housing unit incomplete at the Protaras area, with very good sales prospects as individual units. No interest so far but if completed we are certain that it will be sold either as private sales/or for villa to let, Airbnb option etc. It is a difficult job all round.
On another occasion a hotel apartment project was proposed to be sold for a swap deal at €4.0 mil. + 50.000 sq.mts. added land. An obvious very low value, notwithstanding that the owners, a well organized group, has claimed that with an added €2.0 mil. investment the project could have reached a €10 mil. value (+ the vacant land). The bank refused and the owner has managed to secure from other sources the added investment. Now (1st year of operation after renovation) it is showing a G.O.P. of €2.0 mil. p.a. and rising, making it most successful which based on the G.O.P. it is worth, say €10.0 mil. and this in addition to around 50.000 sq.mts. of added land for further development. Had the swap deal went ahead, the bank stood to lose around ±€4 mil. and now it has the opportunity to receive its debt with the added value and the annual income to go.
Project management is another alternative, where the banks may set up, through sub contract, 2-3 project management teams, not only to manage the development to complete and sale, but also to manage existing projects (see abandoned properties/projects that are vandalized, no proper maintenance and care, arrears in rental collection etc). Private firms could undertake this which based on their own business plan, can take over and subject to a performance guarantee by them.
Yes we are placing added burdens on the financiers, but if they keep their properties as they are at present, their assets/value will be much reduced. A project which we were called upon to value in the year 2016, we warned the bank that security should be in place (half built 60 housing units at Pafos). The idea was turned down and upon revaluation for the year 2017, the project was vandalized, by removing everything from electrical wires, to kitchen counters, aluminium windows etc.
Surely we cannot offer a likeable solution by everybody and a dialogue is required in order to ascertain the problems that each site is facing hoping for a better future (the recent warning by the E.U. on N.P.Ls is an urgent addition).