There are parameters which show that the time is ripe, at least for an initial examination, for the creation of small-scale real estate funds in Cyprus.
The set-up of such funds started a few years ago, but on a large scale set up by mainly financiers and some individuals/agents based on mainly foreign international investors.
Our opinion is based on the following:
- In general, property prices have reached “reasonable” levels for good properties and we do not expect any notable further discount/reduction over the immediate future.
- The financiers offer real estate either in the form of swap deals or auctions at reasonable prices, which may be coupled, on most occasions with financing (to worthy buyers).
- There is ample supply of all sorts of real estate in all districts to be found not only on bank websites but also on the sites of the large investment funds and the auctions that appear and those of the real estate agents (individual sales apart).
- Interest on deposits is reduced, from the level of 6% to now -1% (negative) p.a., whereas deposit rates abroad are also negative (if one manages to open an account) and with many questions asked every 2-3 years with some foreign banks even closing dormant accounts.
- Real estate prices based on recent developments and projections appear to be on the increase (at least for chosen properties directed at the local market).
- Popular foreign investment by locals, such as Greece, is not all the best, bearing in mind the uncertain economic future of this country, whereas London has its problems with the unknown consequences of Brexit.
With all the above in mind and with the, be it, limited finance available of the Cypriot real estate market, is it perhaps the time to examine the possibility of setting up small scale local real estate funds?
We suggest that such funds could vary in size and scope but as a basis, we suggest that:
- Initial fund €3 mln
- Target to borrow €1 mln
- Period of exit from the fund 5 years
- Target for an annual return 4% p.a. (or less depending on capital appreciation potential).
We suggest the following market to target as a start:
- Aim at the seaside areas of the Famagusta region (e.g. Ayia Napa-Paralimni-Sotira-Dherynia) to develop land.
- Target buildings and individual units for income let to solid tenants mid-term lets (at least 3-5 years) which show a return of 3%-5% gross.
- Aim for residential apartments in central town localities and which need renovation/improvement and with good chances of reselling.
Perhaps these funds could be created initially with the financier being the major shareholder, with an option (or otherwise) to depart in 2-4 years.
Since management will be in the hands of the financier, the other shareholders will feel safe, as opposed to a private company/individuals controlling the fund.
The more attractive the fund appears to the market, the greater the demand for it and it is one way out for the banks to dispose of their properties.
If the financiers/majority shareholder “guarantees” an annual income for the initial period of 2-3 years of 1½-2½ p.a. it will become even more attractive securing an initial return plus the expected capital appreciation and the anticipated profit at the end for the shareholders.
The financiers could set up numerous funds of various levels of equity investments.
Larger funds could be created for higher amounts of investment in hotels, golf courses, beach land, student halls, beach villas, villas to let etc.
The above type of investment funds are already established, but with large amounts of many millions, precluding the smaller investors of the ±€50,000 amounts.
Notwithstanding the situation of the Cypriot economy, the real estate market is improving with clear signs of a positive future (the recent situation on the passports issue apart).
Instead of the prevailing situation of financiers sitting back and waiting for investors to be interested, the above vehicle for sales is one option which might attract the big investment buyers from abroad (see Chinese interest for shopping malls, hotel development) as well as others which could be coupled with the Cyprus Investment Scheme (be it now under review).
If this idea gets a proper study and it is promoted, including roadshows, we feel that it is an effort worth exploring especially by the banks.
Regarding alternative investment funds, although it sounds odd, agricultural fund investment should not be discounted outright.
The problem with this fund is the very small pieces of agricultural land.
However, with the halloumi and other local products to be produced as a patented product (kolokasi, chiromeri, prickly pears) are possibilities to be investigated.
If financiers get together and exchange ideas on how to promote these agricultural plots as one lot in one area, it could be possible to come up with large holdings.
So, if one financier owns X plot and another owns a nearby plot, provided they get together, it could be a solution.
The agricultural investment will need a special study on soil suitability and produce quality.
To this end, the Ministry of Agriculture could help with expert knowledge, whereas the various subsidies is an added plus.
Agricultural investments mind you will need lots of persuasion as not easily understood by the wider market and it will be a difficult job.
But then what is one going to do with the various agricultural plots now in bank ownership?
Presently we have noted private real estate firms have set up their own small-scale funds and notably, a Nicosia and a Larnaca developer are pursuing this route.
What is worrying for such private firms, is the behaviour of the administrator and one should consider the provision of some sort of a guarantee by the promoter (say a low return of 1% p.a.) and perhaps involve insurance firms who could guarantee the project.
Innovative investments could also target the public health system where there are shortages of surgery theatres, rehabilitation centres, including nutritionist clinics, substance abuse rehab, special schools for children with learning issues, retirement homes.
Food for thought?