Bank of Cyprus has set up a Real Estate Management Unit (REMU) deploying another tool that would assist the island`s largest lender to facilitate loan restructuring and manage its big commercial real estate loan portfolio more efficiently.
The Unit aims to acquire real estate in a voluntary asset-to-debt swap of non performing delinquent borrowers which otherwise would be follow the foreclosure process.
In an interview, Miltos Michaelas, Director of the newly-established Unit, has told CNA that the aim of the REMU is manifold; to reach settlements that would entail benefits both for clients and the bank, to manage real estate, while removing work load from the bank`s recovery units and would utilise new structures to dispose these real estate. The most important thing, he added, is that the pace of real estate sales will comply with the economy growth rate.
As Cyprus nears exit from its three-year €10 billion bailout, the economy returned to a modest growth in 2015 following three years of recession.
“Our primary aim is to achieve the fastest exit possible from the real estate market without killing the market, the Unit has small and big ideas on how to achieve that but the exit policy goes hand in hand with the course of the economy,” Michaelas added.
The Unit, he said, will provide the bank with another tool which would give borrowers and especially corporations which cannot service their loans at they either due wrong investment decisions or the financial crisis, ended up having a number of real estate and an unserviceable loan.
REMU could come to a voluntary settlement with the borrower by acquiring the real estate pledged as collateral against a part of loan, provided the borrower will be in a position to repay the remaining loan.
As part of Cyprus` bailout, Bank of Cyprus has been recapitalised by deploying the so-called bail out tool, that saw 47.5% of deposits over 100,000 converted to equity. At the backdrop of a three-year economic downturn non-performing loans soared and currently amount to €27 billion or 47% of total loans. As an asset management company that could acquire the distressed loans could not be set up due to Cyprus` high public debt level, the banks were requested to set up large centralised arrears management and loan recovery units to tackle the rising NPL problem that eroded their capital.
“We are not a bad bank, we acquire and manage real estate internally,” he said.
Michaelas stated that as the arrears management unit progressed the bank has amassed considerable experience and built a data base showing the outcome of each distressed case and therefore the Unit can step up the settlement process for cases, which otherwise would end up in foreclosure.
“Let`s be honest, the bank did not want to be a real estate owner but above all realising the economic environment and the Cypriot economy that could not cope with massive real estate disposals found this way out,” he added.
As the real estate management is not a core banking operation, the unit has acquired advisory services from a foreign agency specialising in real estate agency management, that would assist in the disposal of the acquired real estate.
Michaelas added the Unit began operating with a significant number of real estate under management obtained from older cases mainly in Cyprus but from other Boc operations abroad, noting that as restructuring deals progress the number or real estate to be transferred to REMU will increase. He also added that the bank is also considering acquiring real estate from auctions should the opportunities are considered worthwhile.
“We have plans to set up structures that would allow us to liquidate the real estate we have,” he said, noting the bank could bundle mainly large real estate in special purpose vehicles (SPVs), set up structures for attracting foreign investors, while the bank could engage in partnerships with investors.
“We will not close the door to any proposal that would benefit the bank,” he added.
As for the timeframe for real estate management, Michaelas pointed out the bank`s strategy is to manage the acquired real estate for period exceeding three years which is currently the maximum allowed by the Central Bank of Cyprus.
“With a little good will and given the fact the reheating of the economy is our common goal, be believe that the Central Bank will assist us with some extension and not flood the market,” he said, adding however the bank does not intent to manage real estate for ten years.
“We aim to assist the economic recovery, to attract new investors and as the economy gathers pace we will reduce our exposure to a non-core banking sector,” he added.
Furthermore, Michaelas who worked in disposing the bank`s assets abroad, cautioned on moral hazard, saying the bank “will not do any favours and will not assist clients who have the capacity to repay their loans.” The solutions are focused on clients whose cases head towards foreclosure but a voluntary settlement could grant them a second change, he went on to say.
Discussions for setting up a Real Estate Management Unit, Michaelas said began in September 2014 but then the tax regime was not helpful because the capital gains tax and transfer fees rendered voluntary settlements financially unattainable.
According to Michaelas, the turning point emerged after the government sliced transfer fees in half and eliminated capital gains tax in case of bank real estate acquisition.
“That enabled the bank to make deals with clients. The government saw the broader picture and the wider gains for the economy and took the right decision,” he concluded.
