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Time for Real Estate Funds?

26 February 2017

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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 Co/individual to control 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 financiers to dispose their properties, which now/will hold.

There are the parameters nowadays, which show that the time is ripe, at least for an initial examination, for the creation of real estate funds in Cyprus.

Our opinion is based on the following:

  • Property prices have reached rock bottom levels for good properties and we do not expect any notable discount/reduction over the immediate future.

  • The financiers offer real estate either in the form of swap deals or auctions at reasonable prices, which are coupled, in most occasions, with financing (to worthy buyers).

  • There is ample supply of all sorts of real estate type in all districts.

  • Existing buyers and resales to new buyers could be coupled with long term finance (subject to prior agreement with the financiers).

  • Most property sales are sold based on a “clean” owning Co, reducing/doing without transfer fees with the Co ready for operation.

  • Interest on deposits have been reduced from the past, from the level of 6% to now 1½% p.a., whereas deposit rates abroad are around ½% with some foreign banks even charging a “keeper’s” fee for the purpose.

  • The real estate prices based on recent developments and projections appear to be on the increase (at least for chosen properties).

  • There is a prevailing worry for European banks (see Greece/Italy etc) as well as others on their solidness.

  • The popular investment regions by locals, such as Greece, is not all the best, bearing in mind the uncertain economic future of this country, whereas popular London has its own problems with the unknown consequences of the Brexit.

  • Etc etc

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 local real estate funds?

We suggest that such funds could vary in size and scope but as a basis we suggest that:

  • Initial fund €10.0 mil.

  • Target to borrow €5.0 mil.

  • Period of exit of the fund 8-10 years

  • Target for an annual return 4% p.a. (minimum)

  • For your consideration we can suggest the following market target as a start:

  • Aim at the seaside areas of the Famagusta region (e.g. Ayia Napa - Paralimni - Sotira - Dherynia) towards development land.

  • Target buildings for income let to solid tenants mid term lets (at least 4-6 years) which show a return of 4%-5% gross.

  • Aim for residential apartments in chosen localities and which need renovation/improvement and with good chances to resell.

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 Co/individual to control 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 financiers to dispose their properties, which now/will hold.

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 such funds of various levels of equity investments. Larger funds could be set up aiming at other higher amount investments, such as hotels, golf courses, beach land, students hall, beach villas, villas to let etc.

Notwithstanding the situation of the Cypriot economy the market of real estate is improving with clear signs for a positive future.

Instead of the prevailing situation of financiers sitting back and waiting investors to be interested, the above vehicle for sale is one option which might attract the big investment buyers from abroad (see Chinese interest for shopping malls, hotel development etc).

If this idea gets a proper study and it is so promoted, we feel that it is an effort worth exploring especially by the financiers.

Regarding alternative investment funds, although it sounds odd, agricultural fund investment should not be discounted outright (see our previous article Investing in Agriculture). 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 (colokasi, lizo, vine land, prickly pears, aloe and its products etc) are possibilities to be investigated.

If financiers get together and exchange ideas 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 an X plot and another a next door/nearby plot, provided they get together, it could be a solution.

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 a lot of persuasion not easily understood by the wide market and it will be a difficult job. But then what is one going to do with the various agricultural plots now in the financiers ownership lying awaiting.

Food for thought?

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