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The Cyprus Property Challenge

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.

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The Cyprus Property Challenge

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  1. The Cyprus Property Challenge Fiona Mullen Director, Sapienta Economics Ltd www.sapientaeconomics.com

  2. The property challenge • Current state of the real estate market • Scenarios for financing needs: • Compensation costs: 3 valuation scenarios • Resettlement costs: 4 scenarios

  3. Current state of real estate market

  4. Construction (S) barely recovering

  5. Housing investment (S) severely depressed

  6. Future: building permits (S) still declining

  7. North: just as bad

  8. 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

  9. Is price convergence an opportunity?

  10. (Approx) relative prices north: south

  11. Long-term price convergence?

  12. Financing • Compensation • Resettlement/rehousing • Other (Varosha, Famagusta port, EU acquis)

  13. 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

  14. Approaches to valuation of affected property • “Current value” (Annan Plan) • Immovable Property Commission • ECHR Oct 2010 cases • Versus claimant expectations

  15. “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!

  16. “Current value” of GC affect’d property

  17. “Current value” per sq metre

  18. Compensation per sq metre

  19. 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

  20. Big differ’ce in expect’ns v. awards (received 15% of amount demanded)

  21. 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)

  22. 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

  23. Total “compensation value” of affected GC property

  24. How much would post-settlement compensation cost? • Depends on extent of: • Restitution • Exchange

  25. 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

  26. Compensation scenarios

  27. Even scenario 3 is big % of GDP

  28. 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)

  29. Re-housing costs

  30. 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

  31. Restitution scenarios (total dwellings 46,000)

  32. Maximum displacement

  33. 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)

  34. Displacement scenarios (adjusted)

  35. New housing requirement (adjusted)

  36. Re-housing & resettlement cost

  37. 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”

  38. - End - Fiona Mullen Director, Sapienta Economics Ltd www.sapientaeconomics.com

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