CYPRUS BANKS may be exposed to greater risks related to the property market than those reported by rating agency Moody’s last week, according to the leader of the Cyprus Property Action Group.
As the 8 per cent rebound of real estate transactions in the first ten months of the year indicates only a sluggish recovery of Cyprus’ property market, buyers left with no title deeds because their properties have been mortgaged by developers, have no possibility to resell their investment, according to Denis O’Hare.
This comes after the island’s property market saw prices fall 8 per cent in 2009, which the Central Bank says may fall a further 4 per cent this year.
This price decline will put additional pressure on the portfolio of Cypriot banks, according to Moody’s. The exposure of Cyprus’ banking system to the real estate sector was 20 per cent on corporate loans totaling €20.1 million in March, according to the Central Bank of Cyprus. This ratio translates into over €5.7 billion of total real estate debt in March this year, down from €6.3 billion a year before. This 8.8 per cent annual decline followed a 66 per cent increase in March 2009 compared to the year before, according to the Central Bank.
Cyprus’ banks may face additional risks in the form of fines based on provisions of the European Unfair Commercial Practices Directive 29/2005/EC. This directive was transposed into national law in Cyprus in July 2007 and states that it is a violation for a business to omit or hide material facts from buyers, which if had been made known, would have influenced the buyer’s purchasing decision. Violators face a fine of up to 5 per cent of their annual turnover or €256,290. In addition, preventing the Competition and Consumer Protection Service of the Ministry of Commerce, Industry and Tourism, responsible for the implementation of the said legislation, is an offence punishable with a fine of €85,430 or a six-month prison sentence or both.
O’Hare said the banks have violated the consumer protection law in question. “The banks that have a loan agreement with a property buyer are supposed to inform the buyer about material facts. As they know that the developers have mortgages on them” and “first priority” in foreclosures if the developer’s mortgage turns in to a bad loan, he said.
The CPAG leader said there has been evidence of banks “trying to cover their reckless lending by rescheduling loans and handing out even more money,” a practice that led to the intervention of the Central Bank. The latter asked commercial banks to “act within the rules for declaring and reporting non-performing loans. What is now crystal clear is that this orgy of lending has created a toxic debt time bomb for the banks with the developers unable to service the debt because of the world recession”.
Non-performing loans to Cyprus’ real estate sector as a percentage of total real estate loans rose to 4.4 per cent in March from 4.2 per cent a year before, or to €251.3 million from €231.8 million respectively, according to the Central Bank figures. This translates to an increase of 8.4 per cent in bad loans in the real estate sector.
O’Hare warned that unless the government acts now to prevent a “downward spiral” of the property market the banks will be left with “many collateral properties with highly inflated debt on them” which cannot be resold.
“Many local buyers who are struggling with mortgage repayments could cite the EU law which made it an offence for the bank not to inform them of any developer mortgage and simply cease to pay it while they seek redress. In addition, many foreign buyers who were sold property investments using buyer mortgages will have reason to just walk away from these bad investments, especially if they were in Swiss francs which have gone so badly wrong. This will mean that even more developers will go bust,” the CPAG leader said.
