Panayiotis Rougalas
The COVID-19 pandemic and the subsequent suspension of divestments since 2020 have led to the creation of a considerable volume of properties for disposal that banks and credit purchase companies have on their balance sheets. The credit purchase companies, in particular, are now managing the largest volume of non-performing loans, most of which are linked to real estate. The borrowers have two options: either find a compromise solution and resume servicing their problem loans or let the banks and credit purchasing companies proceed with the liquidation-auction of the real estate linked to these problem loans.
Insiders predict that around 6,000 divestment procedures per year will take place in 2023 and 2024. While the two major banks have a low percentage of problem loans on their balance sheets (around 3-4%), which is acceptable to European supervisors, smaller Cypriot banks have higher percentages. However, the absolute numbers of problem loans are not too concerning due to their small balance sheets.
As documented by the Central Bank of Cyprus, while addressing NPLs through instruments such as the sale of loans to Credit Acquisition Companies (CACs) has helped to correct the balance sheets of some credit institutions, these loans remain part of the private debt of the non-financial sector and continue to pose a challenge to the real economy. Most of the properties that are now being auctioned off are those of the companies that bought loans from the banks over the last five years and set up companies on the island.
Regarding divestments, data recorded through electronic auctions shows that in 2020, there were 1,450 auctions. The number increased to 3,000 sales in 2021 and reached 4,000 in 2022. Of these sales, 60% were for fields, 20% for apartments, 10% for land, and 5-8% for residential properties. In single-digit percentages, residential properties with shops, fields with buildings, shops, with empty residential properties, and land with buildings were also sold. However, only 10-15% of these sales were completed.
Over 80,000 loans
According to data from the Central Bank of Cyprus, the end of 2021 saw over 80,000 loans being managed by ECAs, with a maximum contractual balance of EUR 19.2 billion. This figure does not include the EUR 700 million worth of loans sold by Hellenic Bank to Pimco and Themis. If these are included, the total amount rises to EUR 20 billion of loans held by credit purchasing companies. However, the sector is highly concentrated, with the three largest Credit Acquisition Companies holding 80% of the total loans by value. The loan portfolio breakdown shows that 50% of the total contractual balance of loans was in loans to individuals, 47% was in loans to non-financial corporations, and 3% was in other loans. The value of collateral as a percentage of the loan portfolio was 52%, with primary residences accounting for 32% of total collateral and other real estate for 65%. Approximately 3% of the collateral was other. The CBC notes that ECAs own a significant number of properties, acquired through the purchase of credit institutions' portfolios or debt-to-property swaps between ECAs and borrowers.
5,679 properties in 2021
At the end of 2021, Credit Acquisition Companies (CACs) managed 5,679 properties worth a total of EUR 978 million, with this number expected to grow in 2023 with the purchase of more loans. According to data from the Central Bank of Cyprus, most of the properties held by CACs were residential plots, making up 29% of total properties as of December 31, 2021. Residential units accounted for 22%, followed by farmland at 21%, other properties at 19%, commercial properties at 7%, and commercial land at 2%. CACs acquired 3,626 properties worth EUR 584 million and sold 1,946 properties worth EUR 320 million in 2021, either as part of the purchase of credit institutions' portfolios or through debt-for-property swaps. However, the rate of disposal is slower than the rate of acquisition, leading to a further accumulation of real estate on the balance sheets of the CACs. In 2021, 1,503 properties with a total value of EUR 248 million were acquired through the property divestment process, while 2,123 properties with a total value of EUR 336 million were acquired through debt-for-property swaps.
Link to real estate
According to the Financial Stability Report, banks in Cyprus have a considerable amount of exposure to loans secured by real estate, which made up 59.7% of their total loan portfolio at the end of 2021, an increase from 58.8% in 2020. At the same time, loans to households secured by residential real estate amounted to EUR 8.1 billion, accounting for 29.8% of the total loan portfolio, a decrease from EUR 8.8 billion and 30.3% at the end of 2020. On the other hand, loans to non-financial corporations secured by commercial real estate amounted to EUR 8.1 billion or 29.8% of the total loan portfolio, slightly down from EUR 8.3 billion and 28.5% at the end of 2020. Notably, as of the end of 2021, the loans to households were primarily related to the purchase of real estate, with 76.8% of them secured by residential real estate. Meanwhile, loans to non-financial corporations secured by commercial real estate represented 55.8% of all loans to non-financial corporations.
[This article first appeared in the printed edition of 'Oikonomiki' and was translated from its Greek original]
