Cyprus property loan margins cut as Central Bank aims for “soft landing”

— Deals exceeded CYP 1 bln in 1H07

 

The Central Bank of Cyprus is engineering a “soft landing” for the hot property market through the introduction of tougher limits for banks to provide property loans, especially for holiday homes or speculative land purchases and loans directed at non-residents.

The Central Bank has sent a new directive to all banks informing them that the new margin for loans to buy land, holiday homes or a second housing unit have been reduced from 70% to 60% of the value of the land or property, whichever is applicable.

For first-time home buyers, the margin has been kept at 80%, but banks have been urged to refrain from providing loans on the 80% margin to non-residents.

 

— Lower estimate

 

The Central Bank is also trying to close a widely abused practice by the banks and loan applicants when higher valuations are taken as the benchmark for lending, by insisting that from August 22 onwards, banks need to lend based on the lower estimate and valuation of a property under consideration.

As property prices have surged in value in recent years, the notion of lending based on the already inflated prices has added to the property speculative boom and seen the value of bank loans to the property sector surge several fold.

However, the Central Bank has left a small window open for small projects as for loan amounts below CYP 100.000 (EUR 171,000) or for property deals that do not exceed CYP 150.000 (EUR 256,000), it will not insist on proper valuation and instead it will allow for banks to provide loans based on estimates.

 

— Bank lending

 

During the first seven months of the year, bank lending surged 28% year-on-year to CYP 13.83 bln (EUR 23.6 bln) compared to CYP 10.8 bln in the first seven months of 2006 with new loans up CYP 2 bln of loans in the period.

Most of the new loans went to the real estate sector, either to property development and construction companies or under the category of personal loans, most of which ends up buying property.

Personal loans were up 34% to CYP 7.2 bln compared to CYP 5.35 bln in the same period in 2006 while construction sector loans were up 39% YoY to CYP 2.73 bln.

The Central Bank’s new lending criteria are also expected to hurt the ability of property developing companies to borrow heavily from the banks and fuel the sharp price appreciation.

Property developers have strongly criticized the new tougher lending criteria by the Central Bank claiming that it threatens the property sector.

They are mostly worried regarding the freeze on margin lending to non-residents since they reckon that property dealings by non-residents is estimated at CYP 700 mln (EUR 1,2 bln) annually, with a good percentage financed through local bank loans.

 

— Property deals exceed CYP 1 bln

 

Cyprus property deals reached CYP 1 bln (EUR 1,71 bln) in the first six months of 2007, up by 28% compared to CYP 786 mln (EUR 1,34 bln) transacted in the same period in 2006.

Property experts say the exceptional increase in value and the number of property transactions, up by 11.2% to 10.591 in the first half of 2007 compared to 9520 in the first half of 2006, is mostly due to a rush to beat the introduction of VAT on land deals.

The government meanwhile is one of the major winners of the property boom taking advantage of the rapid increase in property deals as during the first half of 2007, tax revenue from capital gains surged by 173% or CYP 80.2 mln (EUR 137 mln) to CYP 126.3 mln (EUR 215 mln) compared to CYP 46.2 mln in the first half of 2006 and CYP 23.5 mln in the same period in 2005.