Real estate in the Republic of Cyprus has been popular with foreigners who own about 100,000 homes—in a country with 803,000 people. The British alone, whose colony this was until 1960, own more than 60,000 homes. Turns out, real estate is Cyprus' national sport sponsored by dumb money. But now it has become a nightmare that is unraveling the finances not only of home owners, but also of developers, banks, and the government. Yet it's hushed up. By comparison, the banks' impending losses on Greek sovereign debt, significant as they are, seem outright manageable.
"The most common mistake people make when buying property in Cyprus is to use a lawyer who has been introduced or recommended to them by a property developer," says Nigel Howarth who has helped foreign property buyers in Cyprus for more than 10 years. Foreign buyers are sitting ducks. They're unaware of the local business culture and don't suspect that their lawyers are in cahoots with developers—aided and abetted by the banks.
The country acceded to the Eurozone in 2008, but it's already in a heap of trouble. A recent loan agreement with Russia of €2.5 billion will keep it afloat for a few months into 2012. Then it's bailout and haircut time. Standard & Poor's just cut Cyprus to BBB. The big problem: exposure of its banks to Greek sovereign, corporate, and bank debt. But not a word about the title-deed scandal and the billions that evaporated with it.
As in the U.S., after years of speculative overbuilding, the real estate market is collapsing. Building permits are down 40.2% for the first eight months of the year and 49.4% for August. Home prices have dropped for six consecutive quarters, according to the Central Bank. The steepest declines were in the coastal regions favored by foreigners. Of the 45,000 unsold properties, many are unfinished, and some are essentially abandoned. The Cyprus Property News points out that they "were built for buy-to-flip investors and are unsuitable for permanent living."
Prices would have dropped even more if the banks had dealt with their non-performing loans. But instead of pressuring developers to sell properties to service their loans, they're pressuring appraisers not to reduce values so that loans appear to be adequately secured.
These kinds of issues have cropped up in the U.S. as well. What's unique in the collapsing housing bubble in Cyprus is a title-deed scandal of unimaginable proportions. And it has embroiled waves of foreign buyers.
"The bulk of the problems stem from the archaic Ottoman land law still in existence in Cyprus which allows these dubious practices," writes the Cyprus Property Action Group. Insufficient industry regulation and lacking enforcement of consumer protection laws also play a role.
The scheme works this way: A developer takes out a mortgage on the land but hides it from foreign buyers. The bank retains the title deed as collateral. When the developer sells the property, the buyers' lawyer, who is in cahoots with the developer, doesn't perform a title search and doesn't "discover" the original mortgage. Buyers, assuming that their part of the property is free an clear, either pay cash or take out a mortgage. The developer pockets the money instead of paying off the original mortgage. The bank goes along because it can collect interest on one or two mortgages. But it retains the title deed as collateral for the original mortgage, and the buyer never sees it.
Throughout, buyers are told by everyone, including the government, that a buyer of immovable property is absolutely protected once the sales contract is lodged with the Cyprus Land Registry, and that they don't need the title deed.
Meanwhile, as the property is still under construction and buyers are overseas, the developer strikes again. Alan Waring, an international risk management consultant, explains:
"Some cases have also involved alleged 'double selling' fraud whereby the developer sells a property to Party A, fails to lodge the contract with the Land Registry, and then sells it again to Party B (possibly for a higher price) but fails to reimburse Party A."
Proving fraud in court seems to be impossible. In a recent double-selling case, the judge ruled against the plaintiff: lodging of a sales contract at the Land Registry does not mean that buyers "automatically and in perpetuity have become the ‘owners’ (as they mean it) of the residence," she wrote. Hence, only possession of a title deed confers protection against double selling.
But the bank still holds the title deed as collateral for the original developer mortgage, and it has the right to foreclose on the property. Under normal circumstances, it takes a bank between 9 to 12 years to obtain control over the property. So banks extend and pretend until the developer goes broke. Then they move to recuperate a property that one or two other "owners" have paid for.... A nightmare. And no legal resolutions are in sight.
The numbers are stunning. In this tiny speck of a country with 803,000 people, about 130,000 properties are still awaiting their title deeds. If the average value of these homes is €150,000, then nearly €20 billion worth of properties might be in dispute, many of them with more than one mortgage and more than one owner.
The banks aren't talking. And they aren't writing down their assets to reflect the layers of mortgages that are worthless. Developers are going bust. The money they pocketed has disappeared. Expat homeowners who don't hold title deeds are terrified of losing their homes, even if they paid cash. There are no legal processes in place to resolve this. Estimates of the missing money range from €3 to €6 billion—enough to take down all Cypriot banks. By comparison, the banks' exposure to Greek sovereign debt is estimated to be €4.2 billion.
In response to the impending haircuts on Greek debt—and not to the title-deed scandal, which continues to get hushed up—the Cabinet approved draft bills to recapitalize its banks and create a fund to stabilize the banking system. But there is no money to put into the fund. A package of austerity measures has been approved. It includes such stalwarts as cutting 1,100 already vacant positions in the civil service and reducing entry-level salaries for civil servants by 10%. However, the government did blink in the title-deed scandal and revised some of the Ottoman property laws—a great example of too little too late.
"It wouldn't surprise me that all those who bought properties in Cyprus might in the end be forced to pay additional money if they want to keep what they already paid for," said my source in Cyprus.