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Are investors likely to return to Cyprus in 2017?

Friday 3rd February 2017

Written by Roy Weatherby, The Overseas Investor

The (in)famous bank account seizure of 2013 is still haunting the Cypriot economy. The property market is in the doldrums and is currently showing very little sign of recovery.
The history of property and non-performing loans
Understanding the situation regarding the property market in Cyprus at the moment means getting to grips with the concept of non-performing loans. In simple terms, non-performing loans are loans in which the borrower is not paying any interest and may not be paying back the original principle. Basically they’re one step short of being bad debt and sometimes the step is a very small one. Banks in Cyprus made a number of loans which are now classed as NPLs and now desperately need to get them off their books to improve their own balance sheets and reduce their exposure if these loans go wrong. As these loans are often secured on property, whatever happens to them is pretty much guaranteed to have some impact on the property market at some point in the future.
Investment in property versus investment in debt
Even at this point, there is some degree of investor interest in the Cyprus property market. In 2016, this amounted to some €2 to €3 million. Well-capitalized international investment funds, by contrast, have spent somewhere in the region of €2 to €4 billion, buying up NPLs (often at a deep discount) with the aim of repackaging and reselling them for a (substantial) profit. Depending on the circumstances, this may involve converting these loans into performing loans (typically by renegotiating the terms of the loan) or confiscating and selling the property on which they are secured.  
Flooding the market with “fire sale” property
Although we previously used the term “investment funds” it would be more realistic to describe the companies as “speculative funds”. They often have experience of operating in places where the economy is in a distressed state and snapping up assets with huge profit potential at bargain-basement prices. Once the situation stabilizes, the high-performing assets are then “flipped” to a new owner - at a substantial profit. The particular concern in Cyprus is that Cypriot banks may be under so much pressure to shift NPLs on to a third party (who, by implication, would be acting without explicit or implicit state backing) that they may find themselves forced to sell on NPLs for properties such as standard family homes and/or rural land at the sort of extreme discount which would make them attractive to these speculator companies. If this happens, there is a very real possibility that borrowers who might have been able to renegotiate with a traditional bank, might simply find themselves dumped by these, more aggressive, companies with the result that a property market which is already struggling could be flooded with property which has been bought at such a low price that it can be sold at way below market value and still make a profit.
Possible ways forward
There are no easy answers, but one potential approach would be to offer investors properties in bundles to force them to take the unattractive properties along with the ones they actually want. This could be coupled with some degree of protection for borrowers, perhaps by obligating these funds to attempt renegotiation, within guidelines, prior to being able to put any of their properties on sale at any price.
For more information or to browse a range of Cypus investments, please contact Hopwood House

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Editorial Contact Details - Conor Shilling
0845 672 6000
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