Cyprus Economy & Real Estate Market

Transcription

1 Resolute Asset Management Cyprus Economy & Real Estate Market Annual Report February 2017

2 2016 Year in Review In 2016, Cyprus experienced a second consecutive year of positive growth and further decline in unemployment. Significant progress has been made in the stabilisation of the banking system and the implementation of structural reforms. The Real Estate market is gradually becoming more active, driven primarily by an increased appetite from foreigners. Economy Real Estate Market Banking Sector GDP Increase of 2.8% from Q1 Q3 2016, outperforming Eurozone growth and IMF forecasts Unemployment 2% drop in unemployment, down to 13% Forecasted to drop to 11.6% in 2017 Property Prices Increase in prices nationwide for residential properties and offices Decrease of 0.8% observed in retail space Rents Rents on all property types increased, with the exception of warehouses which showed a 1.2% decrease YoY Non-Performing Loans (NPLs) 11.8% decrease in NPLs, down to 140% of GDP NPLs as a % of Gross Loans remained stable at c. 48% Household Indebtedness 55% of loans to households remain non-performing, without material change Tourism 20% increase in arrivals to a record of 3.1m in % increase in revenues Transaction Volume 2.8% increase in transactions YoY 5.4% of total RE transactions to Q3 involved consensual bank repossessions Gross Facilities Gross credit facilities have decreased by 12.7% or 7.5b (as at Sep 2016) 2

3 GDP Growth Unemployment Rate GDP & Unemployment A second consecutive year of positive GDP growth and decreasing unemployment point to a recovering Cyprus economy. It is also encouraging that Cyprus managed to exit the Troika economic adjustment program in 2016 as planned and without requiring all of the available funds. Gross Domestic Product GDP has increased by 2.8% in Q1-Q3 2016, compared to the same period last year. Q4 is anticipated to have performed similarly with total 2016 growth surpassing the IMF s forecast of 1.4% and outperforming the Eurozone s 1.7% growth. According to the IMF, GDP is expected to grow by 2.2% and 2.3% in 2017 and 2018 respectively, outperforming the Eurozone (1.7% and 1.5%). Nevertheless, GDP still remains 7% lower than the peak in 2008 (the wider Eurozone already caught up in 2015). Unemployment The average unemployment rate (1) in 2016 was approximately 13%, an improvement on 2015 s 14.9% and better than the IMF-forecasted 15%. Unemployment remains high but is expected to continue improving: the IMF projects a rate of 11.6% in 2017 and 10.3% in Improving unemployment can be attributed to economic growth along with the government sponsored employment schemes. It should however be noted that the total labor force is decreasing, which could mean more people are leaving Cyprus or have given up looking for work. GDP Growth 6% 4% 2% 0% -2% -4% -6% 3.9% 4.5% 4.9% 3.7% -2.0% 1.4% 0.4% -2.4% -6.0% -2.5% 1.5% IMF Forecast 2.8% 2.2% 2.3% 2.2% 1.9% Unemployment 20% 15% 10% 5% 0% 5.4% 4.5% 3.9% 3.7% 5.4% 6.3% 7.9% 11.9% 15.9% 16.2% 14.9% 13.0% IMF Forecast 11.6% 10.3% 8.9% 7.9% Cyprus Eurozone Source: CyStat, Ministry of Finance, Eurostat & IMF Cyprus % Eurozone % Source: CyStat, Ministry of Finance, Eurostat & IMF Although Brexit will be unfavourable to the local economy, the economic outlook remains positive due to factors such as the improving Russian economy, growth in tourism, improvement of Cyprus credit rating, the continuous decrease of NPLs as well as higher public spending and foreign direct investment. 1 According to CyStat s Labour Force Survey data and excluding Q4 numbers which at the time of this publication have not yet been released. 3

4 Number of Transactions Real Estate: Transaction Volume The real estate market is gradually becoming more active, partly due to improving local and international economic conditions. There is also increasing appetite from foreigners to acquire real estate in Cyprus. This has been seen both in terms of sales involving exchange of titles deeds ( Sales ) and contracts of sale deposited at the Land Registry ( CoS ). Total Transaction Volume (1) Bail-in Sales (Parcels) CoS Foreigner Transaction Volume) (1) Bail-in Number of Assets Transacted (Sales & CoS) Famagusta 889 5% Sales 41% CoS 43% A spike in sales was identified in December, possibly because favourable real estate Capital Gains Tax incentives were to expire end-2016 Famagusta 152 6% Paphos % Larnaca % Nicosia % Limassol % Famagusta 436 6% Paphos % Larnaca % Nicosia % Assets Transacted (Sales & CoS) 39% Paphos % Larnaca % Nicosia % Limassol % Limassol % Overseas interest is still exclusively for residential property in coastal regions Institutional investors are scarce and interested solely in finished incomeproducing assets (typically grade A properties) or prime land parcels with potential for tourist and/or mixed-used developments. 1 Source: Land Registry 4

5 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Price Index Real Estate: Property Prices The 6-year downward trend in property prices has ended in 2016 with prices and rents increasing or stabilising across asset classes. Property Prices, Rents & Yields across Cyprus (Q2/2016) Property Prices across Cyprus (Q4/2009=100) Prices 1.1% Rents 4.9% Prices 0.5% Rents 4.9% Prices 0.8% Rents 0.5% Yield 2.0% Yield 4.0% Yield 5.3% Prices 0.0% Prices 2.8% 60 Rents 1.2% Rents 5.2% Yield 4.3% Yield 4.5% Note: Percentage changes for Prices & Rents are on a YoY basis. Yields are stated as at end of Q Houses Flats Retail Offices Warehouses Important factors to consider when gauging the market development: Apartments Houses Retail Warehouse Office Source: RICS Cyprus Property Price Index Q2/2016 (latest available data) Improving local and international economic conditions as well as an increasing demand from locals and foreigners support price and transaction growth Credit supply is currently limited. However, banks are working hard to resolve their NPL problem and as their books gradually improve they will become more willing and able to lend, supporting growth in real estate demand and supply A solution of the Cyprus problem will attract foreign direct investment; however, buyers will initially prefer cheaper properties in the north until prices across the island converge (with prices increasing in the north and decreasing in the south). If the Cyprus problem negotiations fail to bring about a solution, the real estate market is expected to improve in the short to medium term given market indicators. 5

6 Number of Transactions Value of Transactions Real Estate: Restructuring Transactions Cyprus banks have intensified their restructuring efforts to meet the deleveraging objectives imposed by the European Central Bank. Part of the effort includes consensual debt-for-asset swaps ( D4A ), whereby the Bank acquires the RE collateral in exchange for partial or full debt forgiveness. The Land Registry office has recently identified these acquisitions in its records as Restructurings to differentiate them from open-market transactions i.e. sales involving exchange of titles deeds ( Sales ) or via contracts of sale ( COS ). Number and Value of Restructuring Transactions by Asset Type (Q1-Q3 2016) ,000,000 90,000, ,000, ,000,000 60,000, ,000,000 40,000, ,000, ,000,000 10,000, Field Plot House Flat Office Shop Warehouse Other Key Findings (Q1-Q3 2016): 492 D4A restructuring transactions (5.4% of total transactions) Majority of D4A transactions took place in Limassol (42.3% of total) 79% of D4A transactions involved land parcels Highest value transactions pertained to Other properties such as Hotels, Large Residential Complexes, Incomplete Structures, etc. (28% of total) A large proportion of on-boarded houses were of high value, as banks are initially dealing with mid-tolarge corporate borrowers e.g. Developers Number of Transactions Value of Transactions Source: CEI, Land Registry Debt-for-asset swaps are expected to increase as banks intensify their efforts to reduce excessive NPL exposures. 6

7 Monthly Revenue Cumulative Annual Revenue No. of Tourists Tourism Industry Tourism is one of the economy s most important industries and has historically been one of the main sources of income and driver of economic growth in Focus Tourist arrivals increased by 20% in 2016 (1), amounting to a record 3.1m tourists. Tourism revenues were up 12.7% in 2016 compared to 2015 (2). According to the World Travel & Tourism Council (WTTC), tourism s direct and indirect contribution to Cyprus GDP is expected to have risen to 6.7% and 22.4% respectively in 2016, compared to 6.4% and 19.3% in Outlook The upward trend in tourism s economic importance is expected to continue, with the WTTC projecting a 3.7% increase p.a. for the next 10 years. Several factors point to a possible future improvement of the tourism industry, such as: the weak euro, conflict and instability in competing countries in the region, improvement of the tourism product through the development of marinas, the construction of a casino in Limassol and the promotion of agrotourism in rural villages. The tourism industry achieved record arrivals and revenues in 2016 and is expected to continue growing in coming years. Nevertheless, there is plenty of untapped potential which can be exploited. Some fragmented efforts have been made in this regard but a coordinated macro market plan is still lacking. 1 Excluding December for 2015 & 2016 as December data is not yet available for Number of Tourist Arrivals from Main Markets ( /2016) 1,200,000 1,000, , , , ,000 0 United Kingdom Russia Sweden Greece Germany 2013 (Jan-Nov) 2014 (Jan-Nov) 2015 (Jan-Nov) 2016 (Jan-Nov) Revenue from the Tourism Industry ( /2016) 500m 400m 300m 200m 100m 0m Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ,500m 2,000m 1,500m 1,000m 500m 0m 2013 Cumulative 2014 Cumulative 2015 Cumulative 2016 Cumulative Source: Cystat & Cyprus Tourism Organisation 2 January to October for both years as November and December data is not yet available for 2016.

8 % over Gross Facilities Gross Loans YoY % change Household Debt and Non-Performing Loans Despite restructuring efforts by banks in 2016, non-performing loans (NPLs) (1) remain high relative to bank assets (48% of loans) as well as GDP (about 140%). This makes banks reluctant or unable to issue new credit, hampering economic growth. Summary statistics of the latest official CBC data: Total gross credit facilities as at September 2016 decreased by 12.7% or 7.5b to 51.6b (Sep 2015: 59.1b). Although the NPLs decreased by 11.8% y-o-y (from 28b to 24.7b), the NPL ratio remained similar (from to 47.6% to 47.9%). 39.3% ( 9.7b) of NPLs have accumulated impairment losses. 55% and 59% of outstanding loans to households and SMEs are considered non-performing. It is estimated that national NPLs were 140% of GDP at end-2016, an improvement on the 180% at the beginning of the year. Healthy vs Non-Performing Loans 70b 60b 50b 40b 30b 20b 10b 0b 60% 50% 40% 30% 20% 10% 0% Household Debt 16b 25% 14b 20% 22% 20% 12b 15% 15% 10b 9% 10% 10% 8b 6b 5% 5% 4b 0% -2% 0% 2b 0b -6% -4%-5% -10% Oct-16 Provisions NPLs-Not provided for Performing Loans NPLs (%) NPL Provisions (%) Consumer credit Housing loans Other lending YoY % change Source: Cyprus Central Bank NPLs are expected to decrease even further in 2017 as a direct result of the following: Financial institutions are becoming more familiar with and are applying the new Foreclosure and Insolvency laws enacted in 2015 Restructuring and NPL management units across banks continue their loan restructuring efforts and are obtaining consensual resolutions with borrowers The stage has been set for loan sales as legislation is now in place and investors have been showing interest (based on anecdotal evidence) 2016 s extensive restructurings will improve 2017 s NPL ratio due to the 12-month performance requirement. 1 Credit facilities meeting any of the following criteria: in arrears for more than 90 days; in excess of its contractual limit on a continuous basis for a period of more than 90 days; restructured facility which has been non-performing or was in arrears for more than 60dayson restructuringdate; or hasbeenrestructuredmore thanoncewithin a periodof18months. 8

9 Thoughts and Forecasts Noteworthy factors expected to affect the real estate market in 2017 are outlined below. Favourable Factors 1. An improving local and international economic environment could result in more demand for most asset types 2. Property prices have fallen considerably since its peak in 2008: down by 30%-60% depending on type and location. Many potential buyers might have been postponing purchases until after the market bottoms out. Considering that prices now seem to be stabilising (at least in primary locations), these buyers could decide to enter the market soon. 3. Easier access to credit as banks become increasingly willing and able to lend due to: Resolution of NPLs: The second round of foreclosure auctions will attract more attention due to the lack of a reserve price (the 1st round had an 80% reserve) Loan sale legislation and indications of buyer interest will allow banks to offload bad loans (albeit at a considerable discount) Substantial loan restructurings in 2016 is likely to result in a decrease in NPLs in 2017, due to the CBC s classification of restructured loans as nonperforming for at least a year. At the same time, banks will continue to strengthen or establish specialised restructuring/recovery units (e.g. Hellenic Bank s recent establishment of a loan servicing company) to speed up recoveries Easier access to capital as books improve, particularly for BoC due to their new listing on the London Stock Exchange. Professional real estate management activities: BoC s Real Estate Management Unit (REMU) (1) has accelerated the pace at which the bank turns NPLs into REOs (i.e. real estate owned by the bank) and will continue to do so. Furthermore, active property and asset management are ensuring recoveries through real estate sales are maximised. Other banks are following suit by establishing similar units. A new bill has been proposed which would allow banks to complete, perform maintenance on and rent out REOs. If approved, banks would benefit from the ability to make their real estate more marketable, liquid and valuable. 1 Resolute Asset Management is BoC s strategic partner for the set up and operation of this unit 9

10 Thoughts and Forecasts (continued) Unfavourable Factors 1. Incentives such as the 50% reduction of transfer fees and capital gains exemptions for properties purchased between the mid-2015 and end-2016 have created a surge in transaction volume in 2016 (as evident by a spike in volume, especially close to the expiry of the incentives at the end of the year). Although the transfer fee reduction has now become permanent, the capital gains exemption has come to an end which is likely to tamper demand from speculative investors. 2. A significant component of overseas demand, both in volume but more importantly in absolute value terms, has been due to Cyprus naturalisation scheme. The scheme has come under negative criticism from other EU countries, increasing the probability that it may be amended or even suspended in the medium term. 3. Persistent lack of demand for assets in secondary locations, particularly agricultural land and dated industrial buildings, are expected to drive the value for these assets down further. This would have a disproportional impact on prime real estate, especially high-end residential developments. 4. The impact of a solution to the Cyprus problem is uncertain and complex. However, it is anticipated that buyers would initially be drawn to the north due to lower prices (at first), causing prices in the south to decrease due to lower demand. This is expected to be temporary until prices converge. In the long medium to long term, a solution should have a positive impact on the real estate market and overall economy. Housing Plots Real Estate Capital Values 2017 Forecast Stable Commercial Plots +5% Offices Class Α: +10% Class Β: +5% Apartments Centre: +5% Secondary locations: Stable Touristic locations: +5% Shops Centre: +10% Secondary locations: Stable Touristic locations: +5% Fields - 10 (lack of demand) 10

11 Company Profile Resolute Asset Management is an independent specialist asset manager focused on advising owners and managers of distressed commercial real estate exposures. Resolute assists clients in optimising recoveries from a broad range of real estate assets, including non-performing loans and real estate equity investments. Resolute provides these services to financial institutions, institutional investors and fund managers by providing a unique combination of principal investment, banking, workout and legal experience. Contact UK - Headquarters 4 th Floor, 123 Cannon Street London EC4N 5AX T +44 (0) E london@res-am.com Greece 3rd Floor, Mitropoleos Athens T E athens@res-am.com Turkey İstinye Mah., Sulh Sok.İstinye Yokuşu No:10, İstinye/İstanbul T Cyprus Unit A41, Chytron Nicosia T E nicosia@res-am.com Romania Nicolae Filipescu Street 7th Floor Bucuresti, Sector 2 T / 08 / 09 E bucharest@res-am.com Bulgaria 3rd Floor, 11A Aksakov Street 1000 Sofia T E sofia@res-am.com Russia 295 AS, Obukhovskoy oborony pr., St. Petersburg, Italy via Camperio Milan T E italyoffice@res-am.com For more information visit: Disclaimer The information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. 11

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