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The Irish experience following the banking collapse is to be repeated in Cyprus, with the attendant opportunities

May 30, 2018

 

1.  General Impressions

 

Cyprus is a former British colony and shares many of the same traits as common law countries;

  • functioning civil service ,

  • very safe,

  • well educated,

  • good;

    • transport links,

    • water,

    • accommodation,

    • food.

Most Cypriots speak English. The British maintain a large military base on the island and from there direct their operations in the Middle East.

 

In addition to the British influence, Cyprus stands at the crossroads between the Middle East (Lebanon is 100 miles away), North Africa (Egypt), Russia and Ukraine are all prominent. There is very little obvious North Africa immigrant presence. People suffering from serious illness are treated in Israeli hospitals.

 

The population of Cyprus is 850,000, with 350,000 in the capital Nicosia, which is the administrative capital. The two other main population centres are in the beach centres of Larnaca and Limassol. The property market in these cities has been distorted by a €2m “investment for Passport” scheme created by the Cypriot government seeking to attract foreign money into the country. This has resulted in > 3,800 foreign nationals (typically Russian, Chinese and Middle East) buying expensive apartments in Limassol and Larnaca to qualify for passports, which has resulted in a boom for luxury apartments in that price range.

 

The Corporation tax rate is 12.5%, with Capital Gains Tax at 20%. The VAT rate is 19%

Preliminary views

 

While undoubtedly it will have a role in presenting investment opportunities, Examinership is not going to be the key as anticipated at the outcome.

 

Banks are assembling loan books for sale;  

 

Bank of Cyprus which is by far the biggest bank in the market is assembling loans books for sale to US funds.

 

Hellenic  Bank have engaged APC, which is a Czech loan manager to manage its NPL’s, and

 

Co-op bank have (Spanish Bank) Altamera managing its loan portfolio

 

Because of the cost of the write downs this would entail, Astro Bank is managing out its own NPL’s.

 

2. Sources of opportunities

 

The similarities between what happened in Ireland and Cyprus are striking, with Cyprus being about five years behind Ireland in resolving its banking and the associated difficulties.

 

In relation to property financing, whereas mortgage lending has recommenced, there is no financing (conventional or otherwise) available to projects at development stage. As in Ireland this has resulted in pent up demand price increases for completed units.

 

Other than equity investment there do not appear to be sources of commercial funding available to Cypriot companies. As a result there is a mismatch between plot and development costs, and the value of the finished product, where there is a robust market.

 

3. Specific opportunities

 

a. Companies

 

The availability of asymmetric funding (expensive asset financing, mezzanine loan funding, crowd funding, development financing) is very limited indeed

 

There is no funding available for undercapitalised companies, or those trading with unsustainable historic debt. No bank financing for these as yet available.

 

There is no functioning recovery (receivership) structure, albeit there is talk about reforms in this regard.

 

Potential to work with banks to restructure undercapitalised companies, including those rendered insolvent from overtrading arising from the absence of other sources of funding

 

b. Property

 

The residential property market in Nicosia is very sustainable, but not spectacular. It features;

  • pent up purchaser demand,

  • relatively modest cost (80 sqm apart @ between €180k & €220k),

  • bank funding available to purchasers (3 times combined salary),

  • very limited equity available from third parties

  • relatively modest investor returns of between 5% - 8%

  • streamlined planning process – typically planning can be obtained in < 4 months

  • as in Ireland four years ago there is no development funding available

Typical purchase price for starter (2 bed, circa 80sqm) apartments in Nicosia is €180,000 - €190,000, with marquee developers that offer high standards able to command €220,000. Very high specification build cost is €1,000 psm, including cost of car parking. Less elaborate build cost is €850 psm.

 

There is significant pent up demand in Nicosia for office developments which have not been built for five years

 

The market in Larnaca and Limassol is distorted by the cash for passports programme, which requires €2m investment and hold for 3 years post citizenship being granted.

 

4. Opportunities

 

a. Investment in companies

  • Overtrading,

  • Trading profitably but insolvent

  • In need of capital to grow

  • Undercapitalised

  • Out of receivership

b.  Investment in property development

 

No development financing, but functioning mortgage market. Therefore demand. Little development in the past five years, therefore pent up residential and office demand. Types of indicative development proposals are available for further consideration.

 

c.  Financial opportunities

 

There is tremendous appetite, requirement and interest in non- bank lending, including;

  • asset financing,

  • mezzanine loan funding,

  • crowd funding,

  • development financing

For further information regarding doing business in Cyprus, see; http://www.bakertilly.com.cy/media/1267367/doing-business-in-cyprus-new.pdf. Neil Hughes from Baker Tilly's Dublin office (+353 1 669 9999) is on the ground advising Cyprus financial institutions on their non performing loan strategies and is available to discuss opportunities

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