The Cyprus Property Challenge

The Cyprus Property Challenge

Fiona MullenDirector, Sapienta Economics Ltd

www.sapientaeconomics.com

The property challenge

• Current state of the real estate market• Scenarios for financing needs: • Compensation costs: 3 valuation scenarios• Resettlement costs: 4 scenarios

Current state of real estate market

Construction (S) barely recovering

2005 Q1

2006 Q1

2007 Q1

2008 Q1

2009 Q1

2010 Q1

2011 Q1

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Gross value-added in construction (south) (real % change over same period of previous year, seasonally ad-

justed)

Housing investment (S) severely depressed

2005 Q1

2006 Q1

2007 Q1

2008 Q1

2009 Q1

2010 Q1

2011 Q1

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Gross fixed investment in housing construction (south) (real % change over same period of previous year, seasonally ad-

justed)

Future: building permits (S) still declining

2005 Q1

2006 Q1

2007 Q1

2008 Q1

2009 Q1

2010 Q1

2011 Q1

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Building permits authorised (south)(% change over same period of previous year)

North: just as bad

2005 2006 2007 2008 2009-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

Real value added in construction, % change (north)

Post-settlement opportunities

• Reduction of risk for foreign investors• New markets: Turkey (GCs); direct to EU and

world (TCs) • Spending on Varosha• Spending on rehousing/resettlement• Legal certainty for affected properties

Is price convergence an opportunity?

Relative price levels20

30

40

50

60

70

80

90

100

110100

60

30

Is price convergence of GC property an opportunity?

"Turkish title"

"Esdeger/exchange title"

"Rehabilitation title"

(Approx) relative prices north: south

Relative price levels20

40

60

80

100

120

140

160

180

200

200

100

60

30

Relative property prices in the north and south

GC titles in the south"Turkish title""Esdeger/exchange title""Rehabilitation title"

Long-term price convergence?

Relative price levels20

40

60

80

100

120

140

160

180

200

220200

100

Post-settlement price convergence: long-term

All titles in south

All titles in north

Additional 100% increase in price?

Financing

• Compensation• Resettlement/rehousing• Other (Varosha, Famagusta port, EU acquis)

Main financing needs

• Compensation, which depends on:– How property is valued– Restitution-exchange-compensation proportions

• Resettlement, which depends on:– Extent of territorial adjustment– Extent of willingness to be a tenant/landlord– Amount of ‘spare’ housing

Approaches to valuation of affected property

• “Current value” (Annan Plan)• Immovable Property Commission• ECHR Oct 2010 cases– Versus claimant expectations

“Current value” (Annan V)

• “37 Observation: The value at the time of dispossession and the calculation of the increase should be based on the hypothesis that events between 1963 and 1974 had not taken place, i.e. not take into account alteration in values due to those events; it should if possible therefore be based on comparable locations where property prices were not positively or negatively affected by those events.” = highly speculative!

“Current value” of GC affect’d property

7% pa (Matsis) 8% pa (Platis) 10% pa (Planning Bureau)€0.0

€10.0

€20.0

€30.0

€40.0

€50.0

€60.0

€70.0

€27.8

€37.1

€65.5

Current value depending on property price inflation (EUR billion)

“Current value” per sq metre

7% pa (Matsis) 8% pa (Platis) 10% pa (Planning Bureau)€0.0

€5.0

€10.0

€15.0

€20.0

€25.0

€30.0

€35.0

€14.2

€18.9

€33.4

"Current value" per square metre(EUR billion)

Compensation per sq metre

IPC ave. as of Jul 2011 (174 cases); value & loss of use

Curr. value at 8% pa ECHR Oct 2010 (91 plots); loss of use

€10.0

€12.0

€14.0

€16.0

€18.0

€20.0

€22.0

€13.3

€18.9€20.1

Compensation per square metre(EUR )

Why is ECHR more than IPC?

• Wealthier with higher value land have tended to go to ECHR?

• Only recently have the wealthy applied to the IPC?

• Expect IPC average to rise

Big differ’ce in expect’ns v. awards (received 15% of amount demanded)

GC claimed (EUR 116/sq m) ECHR awarded (EUR 20/sq m)€0

€5,000,000

€10,000,000

€15,000,000

€20,000,000

€25,000,000

€30,000,000

€35,000,000

€31,930,359

€5,125,629

ECHR 16682/90 (91 titles): Court award versus claim

ECHR now deems IPC as “fair basis”

• “The Court considers that the amount which, according to the Government, the IPC could have offered in respect of loss of use (approximately EUR 1,202,556.22 – see paragraph 31 above) constitutes a fair basis for compensating the damage sustained by the applicant” – 24 May 2011 (ECHR case 16682/90, App. 9)

Vast range of values in practice

• ECHR:• €1,480/sq metre (shops and apartments)• €503/sq metre (Rock Ruby hotels)• €19.3/sq m (fields & orchards in Karmi)• €1.4/sq m field in Yerolakos• IPC also has similar wide ranges

Total “compensation value” of affected GC property

IPC average (€13.3/sq metre); value & loss of

use

Current value 8% (€18.9/sq metre)

ECHR Oct 2010 (€20.1/sq metre); loss of use only

€0.0

€5.0

€10.0

€15.0

€20.0

€25.0

€30.0

€35.0

€40.0

€26.0

€37.0€39.4

Total "compensation value" of GC affected property(EUR billion)

How much would post-settlement compensation cost?

• Depends on extent of: • Restitution• Exchange

Three compensation scenarios

• 25% restitution, 25% exchange, 50% compensation

• 33% restitution, 33% exchange, 33% compensation

• 33% restitution through TA; 22% restitution in the TC CS/FU; 22% exchange; 22% compensation

Compensation scenarios

50% compensated 33% compensated 22% compensated€0.0

€2.0

€4.0

€6.0

€8.0

€10.0

€12.0

€14.0

€16.0

€18.0

€20.0

€18.5

€12.2

€8.2

Three compensation scenarios (EUR billion)Priced at €18.9/m2

Even scenario 3 is big % of GDP

22% compensation All-island GDP€0.0

€2.0

€4.0

€6.0

€8.0

€10.0

€12.0

€14.0

€16.0

€18.0

€20.0

€8.2

€20.0

22% compensation = €8.2bn or 41% of GDP (€20bn)

Compensation issues to manage:

• Funding: public or private or both?• Payments: cash/ voucher/incentives to invest:

eg education fund?• Scheduling: now or staggered or a mix?• Risks– Bust (public-sector funding only)– Boom and bust (over-liquidity)

Re-housing costs

Cost of a newbuild

• Average household size today: 3• Minimum dwelling size (Annan): 100 m2• Building cost/sq metre in south: €1,000 • Newbuild cost: €100k for every 3 people• Add 50% for land and social infrastructure(?)• Total cost: €150k for every 3 displaced

Restitution scenarios (total dwellings 46,000)

65% GC reinstated 50% GC reinstated 33% GC reinstated 25% GC reinstated0

5,000

10,000

15,000

20,000

25,000

30,000

29,900

23,000

15,180

11,500

Number of dwellings reinstated to GCs: four scenarios

Maximum displacement

65% GC reinstated 50% GC reinstated 33% GC reinstated 25% GC reinstated0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

89,700

69,000

45,540

34,500

Number of TCs who would need new housing: unadjusted

Adjustments

• One-third of housing needs are covered one way or another by TC ownership in the south (circa 15k v 45k dispossessed dwellings)

• Max 20% of TCs rent from reinstated GCs (Cyprus 2015: 17% of GCs would ‘definitely’ or ‘probably’ live in the other CS/FU)

• (Not included: possible use of new empty dwellings)

Displacement scenarios (adjusted)

65% GC reinstated 50% GC reinstated 33% GC reinstated 25% GC reinstated0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

47,362

36,432

24,045

18,216

Number of TCs who would need new housing: adjusted

New housing requirement (adjusted)

65% GC reinstated 50% GC reinstated 33% GC reinstated 25% GC reinstated0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

15,787

12,144

8,015

6,072

Number of new dwellings required: adjusted

Re-housing & resettlement cost

65% GC reinstated 50% GC reinstated 33% GC reinstated 25% GC reinstated€0.0

€0.5

€1.0

€1.5

€2.0

€2.5

€2.4

€1.8

€1.2

€0.9

Cost of rehousing TCs: four scenariosEUR billion

Summary

• Big gap between expectations and payouts• Compensation costs range €8bn-€19bn• Rehousing costs could range €1bn-€2.5bn• Even €9bn is 45% of GDP• Big spending or borrowing needs careful

management in a eurozone economy• Financiers will demand a “story”

- End -

Fiona MullenDirector, Sapienta Economics Ltd

www.sapientaeconomics.com