the cyprus property challenge
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The Cyprus Property Challenge. Fiona Mullen Director, 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. - PowerPoint PPT PresentationTRANSCRIPT
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