1. The Cyprus Property Challenge Fiona Mullen Director, Sapienta Economics Ltd www.sapientaeconomics.com

2. The property challenge Current state of the real estate market Scenarios for financing needs: Compensation costs: 3 valuation scenarios Resettlement costs: 4 scenarios

3. Current state of real estate market

4. Construction (S) barely recovering

5. Housing investment (S) severely depressed

6. Future: building permits (S) still declining

7. North: just as bad

8. Post-settlement opportunities Reduction of risk for foreign investors New markets: Turkey (GCs); direct to EU and world (TCs) Spending on Varosha Spending on rehousing/resettlement Legal certainty for affected properties

9. Is price convergence an opportunity?

10. (Approx) relative prices north: south

11. Long-term price convergence?

12. Financing Compensation Resettlement/rehousing Other (Varosha, Famagusta port, EU acquis)

13. Main financing needs Compensation, which depends on: – How property is valued – Restitution-exchange-compensation proportions Resettlement, which depends on: – Extent of territorial adjustment – Extent of willingness to be a tenant/landlord – Amount of ‘spare’ housing

14. Approaches to valuation of affected property “Current value” (Annan Plan) Immovable Property Commission ECHR Oct 2010 cases – Versus claimant expectations

15. “Current value” (Annan V) “37 Observation: The value at the time of dispossession and the calculation of the increase should be based on the hypothesis that events between 1963 and 1974 had not taken place, i.e. not take into account alteration in values due to those events; it should if possible therefore be based on comparable locations where property prices were not positively or negatively affected by those events.” = highly speculative!

16. “Current value” of GC affect’d property

17. “Current value” per sq metre

18. Compensation per sq metre

19. Why is ECHR more than IPC? Wealthier with higher value land have tended to go to ECHR? Only recently have the wealthy applied to the IPC? Expect IPC average to rise

20. Big differ’ce in expect’ns v. awards (received 15% of amount demanded)

21. ECHR now deems IPC as “fair basis” “The Court considers that the amount which, according to the Government, the IPC could have offered in respect of loss of use (approximately EUR 1,202,556.22 – see paragraph 31 above) constitutes a fair basis for compensating the damage sustained by the applicant” – 24 May 2011 (ECHR case 16682/90, App. 9)

22. Vast range of values in practice ECHR: €1,480/sq metre (shops and apartments) €503/sq metre (Rock Ruby hotels) €19.3/sq m (fields & orchards in Karmi) €1.4/sq m field in Yerolakos IPC also has similar wide ranges

23. Total “compensation value” of affected GC property

24. How much would post-settlement compensation cost? Depends on extent of: Restitution Exchange

25. Three compensation scenarios 25% restitution, 25% exchange, 50% compensation 33% restitution, 33% exchange, 33% compensation 33% restitution through TA; 22% restitution in the TC CS/FU; 22% exchange; 22% compensation

26. Compensation scenarios

27. Even scenario 3 is big % of GDP

28. Compensation issues to manage: Funding: public or private or both? Payments: cash/ voucher/incentives to invest: eg education fund? Scheduling: now or staggered or a mix? Risks – Bust (public-sector funding only) – Boom and bust (over-liquidity)

29. Re-housing costs

30. Cost of a newbuild Average household size today: 3 Minimum dwelling size (Annan): 100 m2 Building cost/sq metre in south: €1,000 Newbuild cost: €100k for every 3 people Add 50% for land and social infrastructure(?) Total cost: €150k for every 3 displaced

31. Restitution scenarios (total dwellings 46,000)

32. Maximum displacement

33. Adjustments One-third of housing needs are covered one way or another by TC ownership in the south (circa 15k v 45k dispossessed dwellings) Max 20% of TCs rent from reinstated GCs (Cyprus 2015: 17% of GCs would ‘definitely’ or ‘probably’ live in the other CS/FU) (Not included: possible use of new empty dwellings)

34. Displacement scenarios (adjusted)

35. New housing requirement (adjusted)

36. Re-housing & resettlement cost

37. Summary Big gap between expectations and payouts Compensation costs range €8bn-€19bn Rehousing costs could range €1bn-€2.5bn Even €9bn is 45% of GDP Big spending or borrowing needs careful management in a eurozone economy Financiers will demand a “story”

38. - End - Fiona Mullen Director, Sapienta Economics Ltd www.sapientaeconomics.com