Denginakipre - Investors in Cyprus are facing strong headwinds

published: December 21-2011

Investors in Cyprus are facing strong headwinds which have the potential to further undermine confidence in the island’s economy.

The European sovereign debt crisis – and Cypriot banks’ exposure to a potential default by Greece - has captured most recent headlines but an ongoing crisis of confidence in the property market and concerns over the banking sector’s mortgage portfolios have left the island’s financial sector vulnerable to further declines.

Property prices are continuing to fall with the number of contracts deposited at Land Registries throughout Cyprus down almost 20 per cent over 12 months. Sales to overseas buyers have fallen even further with some parts of the island reporting year-on-year declines of more than 25 per cent. After a slight fall in early 2011, unemployment is rising sharply again and is currently standing at 8.2 per cent of the workforce. Energy prices, partly affected by the explosion at the Evangelos Florakis naval base which knocked out the main power station at Vassilikou, have risen by 20 per cent and productivity has been hit by a series of rolling power blackouts.

When the credit agencies Moody’s, S&P and Fitch cut Cyprus’s rating again in November, it accelerated the decline in overseas investments held by the island’s banks. And in December, Fitch placed Cyprus – alongside five other members of the Eurozone – on watch for a further downgrade of one or two notches.

But it is the property market – and in particular the mortgage portfolios held by banks and the fiasco over property title deeds– that is of most concern to financial advisors. At DengiNaKipre we are able to offer clear advice to individual investors and businesses on how to navigate safely through the financial hazards that are undermining confidence in Cyprus. In this article, we hope that we are able to answer some of the main questions our readers may have about investing in Cyprus.

Is there a structural problem with the property market?
The main uncertainty over investing in property in Cyprus is nothing recent. It concerns title deeds or Certificates of Registration of Immovable Property as they are more commonly known. These can take up to 10 years to be issued once an investor has bought a property. If the owner of the land on which the house stands – very often a bank holding a mortgage – forecloses, then an investor may lose their investment altogether. There is pressure to change this with a group of European MPs calling for confirmation that the withholding of title deeds is a breach of EU law. EU Commission Vice President Viviane Reding has given the Cyprus government until early January to reveal what it is doing about the situation but any changes are likely to be painfully slow.

What can I do about this?
If you’re considering an investment or simply concerned about your existing arrangements, you should appoint an independent adviser to look at your portfolio and not one recommended by any property developer. An independent lawyer will find the title deeds on any prospective property and will probably advise you to withhold the final payment on any property purchase until the title deeds have been issued.

How does this affect the banks?
The mortgage portfolios held by the banks appear to be overvalued given the continuing fall in property prices. This makes the banks more vulnerable to mortgage defaults. Put simply: if there are a lot of foreclosures, the banks will not be able to recoup the losses on the mortgages made on those properties increasing the banks’ vulnerability to further shocks.

What are the banks doing about this?
Following the Greek sovereign debt crisis and the proposed 21 per cent haircut on Greek bonds, the Cyprus government has put pressure on the island’s banks to increase their capital. The banks have responded by tightening their lending criteria. At a recent financial forum Christos Stylianides, the deputy chief executive of the Marfin Laiki Bank, predicted that lending by banks will continue to be very restricted throughout 2012. This is likely to place further downward pressure on the value of investments in Cyprus.

What is happening now?
Recent measures by the Eurozone group to stabilise the single currency have given the impression that matters are improving in southern Europe. But the outlook remains highly uncertain with Cyprus particularly vulnerable. The headline figures on the Cypriot economy – which show a net inflow of deposits from Greece – mask an underlying malaise: that a small country like Cyprus cannot afford to support its large banking system should it get into trouble. Stuart Thomson, a chief economist at Ignis Asset Management, believes that not only are Cypriot banks highly exposed to Greek debt, but that the build-up of financial assets on the island has created an unsustainable situation similar to that faced by Ireland two years ago. “There is a material risk that at least some Cypriot banks will require state support over the medium term,” he said.

What is going to happen looking further ahead?
Many financial experts believe that Cyprus may end up turning to the European Financial Stability Fund to recapitalise the island’s banks. This will have much wider consequences with some degree of economic governance of the island being imposed by Brussels including changes to the tax system. This would, of course, undermine Cyprus’s status as an offshore haven. Mr Thomson explained: “Cyprus would be an obvious test of this new hard line policy (by the EFSF).”

I’m an overseas investor. How should I respond?
The most important advice is not to panic which would only serve to make the situation worse. DengiNaKipre believes that investors should use their common sense and be skeptical about reassurances on the state of Cypriot banks, the economy and the island’s property market. If you are either considering placing investments with a Cyprus-based institution or already have capital tied up on the island, you should look at the bank’s capital base and its property portfolio before deciding whether your investment should be moved.

How much is safe?
Although deposits of up to €100,000 are protected under the Cyprus Deposit Protection , if you’re an investor you should try to diversify your holdings. A sensible sum to have invested in a single Cypriot institution should be less than €25,000.

How quickly should I act?
Bearing in mind that opening an account elsewhere could take up to a month, you should start looking for other places to deposit funds now and start considering your exit options. It appears that many investors have been already been doing this. The Central Bank of Cyprus released figures in the summer which showed that deposits held by the island’s financial institutions fell from €7.5billion to €6.1billion in just one month.

DengiNaKipre stands ready to help new and existing clients navigate their way through this situation with a discrete and completely trustworthy service.