Transcript Fiona Mullen

The Cyprus Property Challenge
Fiona Mullen
Director, Sapienta Economics Ltd
www.sapientaeconomics.com
The property challenge
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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
Gross value-added in construction (south)
(real % change over same period of previous year, seasonally adjusted)
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
Housing investment (S) severely
depressed
Gross fixed investment in housing construction (south)
(real % change over same period of previous year, seasonally adjusted)
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
Future: building permits (S) still
declining
Building permits authorised (south)
(% change over same period of previous year)
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
North: just as bad
Real value added in construction, % change (north)
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0
2005
2006
2007
2008
2009
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?
Is price convergence of GC property an opportunity?
110
100
100
90
80
70
60
60
50
"Turkish title"
40
30
"Esdeger/exchange title"
30
"Rehabilitation title"
20
Relative price levels
(Approx) relative prices north: south
Relative property prices in the north and south
200
200
180
160
140
GC titles in the south
100
"Turkish title"
120
100
"Esdeger/exchange title"
60
"Rehabilitation title"
80
30
60
40
20
Relative price levels
Long-term price convergence?
Post-settlement price convergence: long-term
220
200
200
180
160
140
Additional 100% increase in price?
120
100
100
All titles in south
80
All titles in north
60
40
20
Relative price levels
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
Current value depending on property price inflation
(EUR billion)
€65.5
€70.0
€60.0
€37.1
€50.0
€40.0
€27.8
€30.0
€20.0
€10.0
€0.0
7% pa (Matsis)
8% pa (Platis)
10% pa (Planning Bureau)
“Current value” per sq metre
"Current value" per square metre
(EUR billion)
€33.4
€35.0
€30.0
€18.9
€25.0
€20.0
€14.2
€15.0
€10.0
€5.0
€0.0
7% pa (Matsis)
8% pa (Platis)
10% pa (Planning Bureau)
Compensation per sq metre
Compensation per square metre
(EUR )
€22.0
€18.9
€20.1
€20.0
€18.0
€16.0
€13.3
€14.0
€12.0
€10.0
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
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)
ECHR 16682/90 (91 titles): Court award versus claim
€31,930,359
€35,000,000
€30,000,000
€25,000,000
€20,000,000
€15,000,000
€5,125,629
€10,000,000
€5,000,000
€0
GC claimed (EUR 116/sq m)
ECHR awarded (EUR 20/sq m)
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
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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
Total "compensation value" of GC affected property
(EUR billion)
€37.0
€39.4
€40.0
€35.0
€26.0
€30.0
€25.0
€20.0
€15.0
€10.0
€5.0
€0.0
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
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
Three compensation scenarios (EUR billion)
Priced at €18.9/m2
€18.5
€20.0
€18.0
€12.2
€16.0
€14.0
€8.2
€12.0
€10.0
€8.0
€6.0
€4.0
€2.0
€0.0
50% compensated
33% compensated
22% compensated
Even scenario 3 is big % of GDP
22% compensation = €8.2bn or 41% of GDP (€20bn)
€20.0
€20.0
€18.0
€16.0
€14.0
€12.0
€8.2
€10.0
€8.0
€6.0
€4.0
€2.0
€0.0
22% compensation
All-island GDP
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
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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)
Number of dwellings reinstated to GCs: four scenarios
29,900
30,000
23,000
25,000
20,000
15,180
11,500
15,000
10,000
5,000
0
65% GC reinstated
50% GC reinstated
33% GC reinstated
25% GC reinstated
Maximum displacement
Number of TCs who would need new housing: unadjusted
89,700
90,000
69,000
80,000
70,000
60,000
45,540
50,000
34,500
40,000
30,000
20,000
10,000
0
65% GC reinstated
50% GC reinstated
33% GC reinstated
25% GC reinstated
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)
Number of TCs who would need new housing: adjusted
47,362
50,000
45,000
36,432
40,000
35,000
24,045
30,000
18,216
25,000
20,000
15,000
10,000
5,000
0
65% GC reinstated
50% GC reinstated
33% GC reinstated
25% GC reinstated
New housing requirement (adjusted)
Number of new dwellings required: adjusted
15,787
16,000
12,144
14,000
12,000
8,015
10,000
6,072
8,000
6,000
4,000
2,000
0
65% GC reinstated
50% GC reinstated
33% GC reinstated
25% GC reinstated
Re-housing & resettlement cost
Cost of rehousing TCs: four scenarios
EUR billion
€2.4
€2.5
€1.8
€2.0
€1.2
€1.5
€0.9
€1.0
€0.5
€0.0
65% GC reinstated
50% GC reinstated
33% GC reinstated
25% GC reinstated
Summary
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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 Mullen
Director, Sapienta Economics Ltd
www.sapientaeconomics.com