CYPRIOT PROPERTY PROBLEMS

UNCLAS SECTION 01 OF 03 NICOSIA 000275 SENSITIVE SIPDIS TREASURY FOR OFFICE OF EASTERN EUROPE E.O. 12958: N/A TAGS: ECON EFIN PREL CY SUBJECT: CYPRIOT PROPERTY PROBLEMS REF: NICOSIA 107 ¶1. (SBU) Summary. While the worst effects of the global financial crisis have largely bypassed Cyprus so far, bureaucratic delays transmitting title deeds to individuals seems to be leading to growing problems in the property sector here. Local banks have a very high exposure to the property and construction markets. If these markets decline precipitously from current levels, the financial structure of the country would be severely impacted. That the problem is the focus primarily of the many British citizens (rather than Cypriots) who have purchased property (mainly holiday and retirement homes) in Cyprus seems to make the GOC even more reluctant to deal firmly with the situation. The fallout from a major court case will also impact how property values are viewed on the island. End Summary. ¶2. (U) Real estate has been one of the key drivers of the Cypriot economy over the past five years. With Cyprus' 2004 accession to the EU, Europeans became even more interested than hitherto in buying a vacation or retirement property on a sunny, low-crime, Mediterranean island. The influx of northern European, Russian, and especially UK property buyers caused real estate values to double since 2004 and led to a construction boom. Loans to developers now comprise almost 40 percent of local commercial bank's loan portfolios ¶3. (U) The boom is now over, with the global decline in asset values echoing in Cyprus, albeit not as significantly. Property prices in areas most favored by UK buyers (Paphos and Agia Napa) are most affected, with prices down 25-30 percent from early last year. In localities catering more to local or Russian markets (Nicosia and Limassol) prices are flat. Why Are Title Deeds So Hard to Obtain? -------------- ¶4. (SBU) Exacerbating the downturn, and what could potentially cause a more significant decline in prices, is the growing difficulty of property buyers acquiring title deeds from property developers. Developers typically borrow to buy and build a property project, then sell "off-plan" to individual unit buyers who make progress payments until taking final delivery and moving in. However, there is no time line for actual delivery of the title deed from the developer who holds the deeds to the entire development until two things happen: - The Land Registry Office inspects the final development and confirms that the project is according to code, zoning regulations, and the original plans filed by the developer with the Office. - The bank holding the mortgage on the development releases the collateral as a result of being fully repaid by the developer/borrower. ¶5. (SBU) This process can take anywhere from three to thirty years, and has been getting more drawn out recently. The Land registry only conducted 1600 final inspections last year, while more than 20,000 new dwellings were built. There are reportedly 100,000 homes awaiting final title deeds, of which 30,000 belong to non-Cypriots. Banks, of course, hold on to their collateral until the entire mortgage is paid by the developer. There is no sub-division of the overall project deed into individual deeds until the above two preconditions are met. ¶6. (SBU) As an "accommodation" developers have typically been willing to "buy back" a unit within one of their developments for a fee that range from 15-30 percent of the price that a second buyer pays (since the developer holds the title deed, only they can legally buy the property back). When prices were rising, anxious sellers were not happy paying what amounted to such a large commission, but typically went along since they had no other options, usually still made money in the transaction, and did not have to wait too long for the transaction to be completed. But with prices declining, buyers becoming increasingly rare, and developers' cash flows under pressure, this procedure is no longer operative. Meanwhile, many UK residents are finding that they can no longer afford to maintain two homes or, if retired, their pensions do not go as far in Cyprus given the UK Pound has depreciated against the Euro by about 12 percent since November 2008. Fear Leading to More Problems -------------- NICOSIA 00000275 002 OF 003 ¶7. (SBU) Many foreign buyers claim they were unaware that they would not receive their title deeds upon final payment to the developer, and an association of foreign homeowners (the Cyprus Property Action Group, CPAG) accuses developers and lawyers of being in cahoots to mislead foreign buyers about title deeds and the GOC of not doing anything about the situation. This has led to a further decrease in foreign buyers and an even greater desire among some to sell. And since they cannot sell without a title deed, there is a growing number of foreign property owners becoming more vocal and crying fraud. CPAG reports receiving more than 100 calls or e-mails per day from people looking for assistance. ¶8. (SBU) Banks have told us that they expect several property developers to become insolvent this year as they are unable to sell off their most recent developments and service their loans. In this case, according to a local lawyer, individuals in these developments have no rights to their assets because the foreclosing bank would obtain the title deed as mortgage-holder. Further complicating matters, there are reports that some developers re-mortgaged completed projects to finance new developments. If any large developers declare bankruptcy, there will be significant difficulty unwinding all the competing claims, although CPAG's biggest concern is that its members would be evicted as the foreclosing bank resells the foreclosed property to a new buyer. UK Gets Involved -------------- ¶9. (U) News of the situation has made it to the British and European parliaments with one British MEP writing to the Cyprus Justice Ministry: "Is Cyprus a rogue state beyond the fringe of civilization? How could this practice of retaining title deeds, after the sale of a property, be condoned?" CPAG also is considering bringing the matter to the UK Department of Trade to demand that the many Cypriot developers with sales offices in the UK be closed for "fraudulent sales practices." Some observers are concerned that this agitation may result in making buyers even scarcer and price declines to accelerate. ¶10. (SBU) The UK High Commission is working with the GOC and CPAG to devise a solution to the title deeds issue, but has not made any progress. Banks will not give up their collateral and the bureaucracy has been unable to devise a way to speed up Land Registry inspections, resorting instead to occasional "amnesties" declaring properties to be approved even in the absence of a physical inspection. Bankers and Cypriot Homebuyers Don't See a Problem -------------- -------------- ¶11. (SBU) We have spoken to commercial bankers and the Central Bank about the situation, and they are confident that their balance sheets are protected because of conservative lending practices over the years. They have never lent for more than 80 percent of value and claim that they have been careful to assure that there is only one loan per property (most foreign buyers pay in cash, often re-mortgaging their UK home to buy their Cypriot property). ¶12. (SBU) There has been very little reaction to this problem from Cypriots, even though they also typically must wait for years for their title deeds. This is because Cypriots are not usually buyers in the neighborhoods and developments that have seen the largest price declines, and because they typically are far less likely to be in circumstances in which they urgently need to sell. Finally, Cyprus being a small place, most Cypriots are confident that, if they did need a title deed urgently, they would find some way to get one or work with the bank holding the developer's mortgage to protect their asset. ¶13. (SBU) Comment: Cypriot officials are extremely sanguine about this situation, in marked contrast to the near hysteria of many of the British homeowners who claim "a country-wide conspiracy" is denying them their "human rights." The irony is that the rights of property owners is one of the major sticking points in the reunification negotiations, with Greek Cypriots insisting that an individual's property rights are sacrosanct, and so GC owners of properties located in the Turkish Cypriot administered parts of the island should have the ultimate determination on the disposition of a property. Tensions about property rights between the two communities will only increase in the wake of the expected April 28 European Court of Justice decision on the "Orams" case (reftel). If the ECJ finds for the GC party, any individual NICOSIA 00000275 003 OF 003 who purchased formerly GC-owned property in north Cyprus can have their assets attached in their home nation to satisfy the judgment of a GC court. We are hearing reports that TCs are planning to pursue a similar path against the GOC for formerly TC-owned propertied in the Republic of Cyprus. The effects all this will have on property prices island-wide are not likely to be positive. Urbancic